Wealth Check: When the debt turns bad, the only answer is to live with mum and dad

The juggling act of getting out of the red and putting together a deposit to climb on to the housing ladder
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The Independent Online

Is clearing £5,500 more urgent than saving?

He's 27 and still living with his parents, but that isn't a problem for Andrew Wells - it's the answer to a problem.

His decision to stay in the family home in West Sussex has helped him with two financial goals: paying down his debts and saving to buy his first home.

Andrew fell into financial difficulty around 18 months ago after running up debts of £10,000 on credit cards, a car loan and student loans.

At that point, he decided to get things under control and consolidated the different amounts owed on to cheap credit cards offering balance transfers at 0 per cent.

"I have transferred the balance several times since, and have always chosen 0 per cent deals," he says.

Andrew has now managed to whittle his debt down to £5,500 on a credit card from Intelligent Finance which remains a 0 per cent deal until mid-January.

While he is paying this off at £110 a month, he is also trying to build up his savings. So far, he has put away £5,800 in an ING Direct savings account which currently earns interest at 4.75 per cent.

He works for a media agency on a salary of between £20,000 and £25,000 a year, and is due to start a new, similar job in a few weeks' time.

However, he wonders if he's managing his money efficiently.

"I'm uncertain whether I should go on ploughing money into my savings account or whether I should just use my capital to pay off my debt."

His other financial concern is saving enough for a deposit that he and his girlfriend can use to buy a home together in around 12 months.

"We are looking to buy in the Fareham or Portsmouth area in Hampshire," he says. "We're looking at something in the region of £150,000 for the house, but don't know whether we'll be able to afford this."

On the plus side, living at home means Andrew's outgoings are relatively low: he has to pay only a small amount of rent to cover his food.

Since April this year, he has been contributing 3 per cent of his salary to a company pension scheme, while his employer puts in 5 per cent.

He would also like to begin investing in shares but is not sure how best to go about this.

Andrew has no protection policies.

The cure

Switch £3,000 into a mini cash ISA

While saving and clearing his debts, Andrew should stay at home as he'll "never live as cheaply anywhere else", says Tony Catt at the independent financial adviser (IFA) of the same name.

Switching most of his savings into a tax-efficient mini cash individual savings account (ISA) would help him build up even more money, adds Paul Byles from IFA Towry Law.

DEBTS

As the interest payable on Andrew's credit card is currently 0 per cent, and he is earning 3.78 per cent after tax on his ING Direct account, "it makes sense for him to continue his regular £110 payments rather than use all his savings to clear the debt right away", advises Mr Catt.

But he warns that if Andrew hasn't finished paying off his debts by the time he applies for a mortgage, it could affect the sum he's eligible to borrow or the rate at which he is lent money.

That he has been in debt could actually work in his favour during a mortgage application, adds Mr Catt. A credit history can give a prospective lender reassurance that a borrower is able to maintain regular payments.

SAVINGS AND INVESTMENTS

Andrew should switch £3,000 of the £5,800 balance in his ING account into a mini cash ISA, says Mr Byles. This is the maximum allowance for money to grow tax-free in such an account, he adds, and the Halifax is currently paying 5 per cent.

As he is planning to build a deposit for a house in the near future, Andrew should steer clear of the stock market, suggests Alex Pegley from IFA Calculis. "While shares have traditionally posted higher returns than other investments, they are more volatile and generally not suitable unless the capital can be committed for over five years."

Once Andrew and his girlfriend have saved the sum they need (for both a deposit and to cover the costs of buying), they should build an emergency fund - around three months' worth of the higher earner's net salary.

PROPERTY

Andrew should put together a deposit of at least 5 per cent (£7,500 for the £150,000 target price), says Mr Byles. "Assuming a £142,500 repayment mortgage, at an interest rate of 4.25 per cent for two years, the monthly payments would be around £775."

However, Mr Catt says the couple should aim to raise a bigger deposit of 10 per cent. This will mean they get better mortgage deals and also avoid a higher lending charge, which is imposed by some lenders to protect themselves in case borrowers can't meet their repayments.

RETIREMENT

Making pension contributions now should help build greater returns in retirement, and Andrew should join his new company's scheme straight away, says Mr Byles.

Depending on the type of pension his current employer offers, he should probably expect to suffer a transfer fee for switching the contributions made so far into the pot at his new firm.

PROTECTION

As Andrew has no dependants, he has no need for life assurance.

But Mr Byles recommends he request information on his new employer's sick pay scheme - to guard against the impact of prolonged illness or disability. "If that scheme is inadequate, he could look at income protection."

Interview by Esther Shaw

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