Wealth Check: Working on costly loan repayments should be top priority

The burden of personal debts and credit card payments means a chef can't make headway on investing or planning for retirement
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The Independent Online

The patient

Robert Coombs wants to clear his debts so he can get into a more stable financial position. This, he hopes, will mean he gets to spend more time with his family.

The 33-year-old lives in Weymouth, Dorset, with his wife, Zuleika, 30, and their two daughters, Chloe, 7, and Daisy, 30 months. Robert works as a head chef and earns around £17,500. He has been in this job for two years.

One of the biggest issues for Robert is the fact that he and his wife owe a hefty £45,000 on a personal loan with Lloyds TSB. They currently make monthly repayments of £966.

They also owe about £10,000 on two credit cards. "We owe £6,000 on a card with MBNA and pay off £200 a month, and owe £4,000 on a card with Santander and pay off £125 a month," says Robert. "We'd love to clear these debts so we can get our finances back on track and start building up a nest egg for the future."

The couple have struggled to build up much of a savings pot, and currently have just £200 in an account with Lloyds TSB. They have no money put aside in investments.

The family lives in a three-bed property in Dorset; they bought this for £159,000 in 2011. "We have a mortgage for £112,000 and this is a fixed-rate deal with Santander at a rate of 3.69 per cent," says Robert. "This is on a repayment basis and we pay around £544 a month."

To date, Robert has not been paying into a pension – but that is set to change as his employer has just reached its auto-enrolment staging date. Under auto-enrolment, all employees are automatically enrolled into a pension unless they make the deliberate choice to opt out. Enrolled employees then need to pay into the pension themselves, and their employers will also contribute.

In terms of protection policies, Robert pays £54 a month to Scottish Widows for life insurance and critical illness cover.

The cure

Our panel of independent financial advisers (IFAs) agree that Robert is right to highlight paying off his debts as his number one priority. In addition, they urge him to start both building up cash savings and paying into a pension as soon as he can.

Clear debts as soon as possible

Robert needs to focus on his debts, as he won't be able to adequately address other financial goals until this is in hand, says Nick Evans at One Life Wealth Planning.

"Robert has a modest salary and his monthly debt commitments are high," he says. "In order to clear these debts, Robert will either need to find additional money from somewhere to increase his monthly repayments, or he will need to renegotiate his debts with his lenders to be repaid over a longer period. The latter will reduce his costs per month, but will be more expensive in the long run."

Patrick Connolly at Chase de Vere says Robert needs to prioritise paying off the debt where he is paying the highest level of interest.

"This involves him finding out the exact rate of interest on each card and loan," he says. "He also needs to try and move any debt that won't be paid off in the short term somewhere he will pay less interest."

Useful sites for comparing rates include MoneyFacts.co.uk and MoneySupermarket.com.

"I would suggest Robert puts all other financial planning on hold and focuses solely on addressing his debt for the time being," adds Mr Connolly. "Right now he needs to concentrate on paying less interest – and paying them off as quickly as he can."

Claim tax credits

Jaskarn Pawar at Investor Profile says Robert and Zuleika should ensure they are claiming the tax credits they are entitled to.

"The tax credits system is in place for people like them who are working hard to bring up a family in difficult times," he says. "As they have two children, they should be able to claim both working tax credits and child tax credits. This would give them valuable additional income that could help them to break even – and possibly even to pay off some of their debts."

For more information on tax credits, call 0345 300 3900 or go to: www.gov.uk/contact-the-tax-credit-office.

Focus on building up savings

The fact that Robert has very little money in savings is a concern, according to Mr Connolly.

"This means he doesn't have any buffer to protect him if he has a short-term emergency where he needs to get his hands on some money quickly," he says. "That said, there is very little point in him having money sitting in a savings account earning interest at 1 or 2 per cent when he is paying far higher rates on his other debts. Once he's paid off his debts, he should look to build up some cash savings."

At this stage, Robert should begin by saving into a cash individual savings account (Isa), as returns are tax-free. To compare rates, try sites such as SavingsChampion.co.uk.

"Robert could also boost his income by using a cashback site such as Quidco.com when making purchases," adds Mr Connolly.

Start pension saving right away

At 33, Robert should ideally already be making regular pension contributions, according to Mr Connolly.

"The sooner he starts saving into a pension, the better his prospects will be for a comfortable standard of living in retirement," he says. "I'd recommend Robert stays in his company pension scheme, although I wouldn't suggest paying in any more than the minimum levels while he concentrates on paying off his debt."

Mr Pawar agrees that while paying into a pension may come as an unwelcome additional expense, it does make good financial sense.

"Starting out with even a small contribution towards a pension will set up a habit that will serve Robert well in the future," he says. "And when he has more disposable cash, he can increase the amount he saves."

Delay investing for now

Starting to invest is not a priority for Robert, says Mr Connolly. "He should concentrate on paying off his debt and building his cash before making any investments," he says.

Look at mortgage options

Mr Pawar says a fixed-rate mortgage is a sensible approach for Robert, as this allows him and Zuleika to plan their future expenses with more certainty.

"They may want to investigate the possibility of increasing the amount they can borrow on the mortgage," he says. "They could then potentially use that money to pay off the loan from Lloyds TSB."

Alternatively, Mr Evans suggests that Robert could speak to his lender about moving his mortgage to "interest-only" for a period of time.

"This would give him chance to concentrate on repaying the short-term, more expensive debt," he says. "He may also have the option of a payment holiday with his lender which could offer the same flexibility. But either option will very much be at the discretion of the lender."

Mr Connolly adds that while the mortgage rate of 3.69 per cent is low by historic standards, there are cheaper deals available.

"However, Robert would probably face a financial penalty if he stopped this deal," he says. "Equally, given the level of his debts, he may also struggle to find a lender who would be prepared to lend to him on better terms.

Taking all this into consideration, the best option for Robert may be to retain his existing mortgage until the end of the fixed term – and then to review it after that."

Review protection policies

Robert needs to ensure he has adequate life insurance in place so that his children are financially looked after should anything happen to him or his wife, says Mr Connolly.

"The right cover will ensure all his debts are paid off," he adds.

As a starting point, Robert should find out whether his employer offers any protection benefits; Zuleika should do the same.

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