Wealth Check: Building for a future in architecture

A new graduate wants to begin her career by drawing up clear financial plans, so that her growing income should help her with her security

Like many graduates starting out in the big, wide world, Sara Holland faces the student loan burden. With an income for the first time, she is worried about how to spend her money and save for the future.

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Like many graduates starting out in the big, wide world, Sara Holland faces the student loan burden. With an income for the first time, she is worried about how to spend her money and save for the future.

Buildings and their designs were ingrained in 24-year old Ms Holland. As a child, her father dragged her around looking at different types of buildings, his particular hobby. It is little wonder Ms Holland has spent all her higher education on building.

She was born in Scotland and spent six years taking a BArch and a post-graduate diploma in architecture at Edinburgh College of Architects. She is now studying for a master's.

At first, Ms Holland had hoped to find a job in Edinburgh, but found that property prices and the cost of living were far too high, so she moved to Cumbria last July. Today she works as a student architect for a small practice, Acanthus Lowe Raye Architects in Penrith.

Ms Holland's ambitions, apart from putting her finances in order, are to carve a niche for herself in Cumbria, specialising in small conservation, and to climb the Cumbrian mountains. "It's time to take out my hiking boots," she says. "I can't live in the Lake District and not climb the mountains."

Now that Ms Holland has started to earn an income, she wants to make sure she is using her money properly. "The temptation to spend doing up the house is high, but I don't want to waste the money. I want to start planning for the future. I don't want to put things off to the last minute."

She is focusing on her mortgage, student loan, car loan and her pension. Ms Holland lives on her own in her two-bedroom flat in Penrith. She has a £48,500 Egg Saver mortgage, and pays £260 to it each month. She also has a Rover 214, which she bought for £6,000, putting down a lump sum of £4,000 and paying the rest off monthly. Her biggest debt is her £5,000 student loan.

At present, Miss Holland's salary is below the £18,000 threshold, which means she does not have to start paying off her loan until April next year. Then she will have to pay £85 a month for five years at a rate of 2.9 per cent.

The Egg mortgage offers a rate of 4.74 per cent and is part-endowment and part-repayment. This means £40,000 is set against life insurance and the remaining £8,500 is repayment. Her question is: are there other offers that may be better-suited to her circumstances?

She has a stakeholder pension with her company and she and her employers each contribute 3 per cent, about £500 per year. When she started her pension she decided to opt out of Serps. Miss Holland wants to know if this was the best choice.

We have put Miss Holland's queries to our board of advisers: Ray Boulger, at Charcol, Colin Jackson, at Baronworth and Ken Rayner, at the MarketPlace, Bradford & Bingley.

'First choice should be monthly savings in an Isa wrapper'

Profile

Sara Holland, 24

• Status: Single
• Occupation: Student architect for Acanthus Lowe Faye
• Education: BArch and post-graduate diploma at Edinburgh College of Architects. Now studying for a master's in architecture.
• Salary: £16,000
• Property: Two-bedroom flat in Penrith, Cumbria
• Motoring: Rover 214. Bought for £6,000. Paid £4,000 cash, £2,000 over 18 months.
• Outgoings: Mortgage £260; insurance £73; property management fees £42; utilities £160; car insurance £30; car payment £100; food £120; entertainment £120; gym £35; company pension £35; Scottish Friendly savings bond £25; petrol £50. * Investments: Scottish Friendly Savings Bond £50, life insurance (£43,000) with Standard Life, stakeholder with Norwich Union
• Debts: Egg Saver mortgage 4.74 per cent, £48,500. Student Loans Company £5,000. Car loan £2,000; three credit cards, all paid off.

Solution 1: Planning

Mr Jackson says: "Although Ms Holland's salary is £16,000, after taking into account tax and national insurance, she will end up with approximately £12,300 per year, or £1,026 per month." Ms Holland has little money to save or spend. But in time her salary will increase and then she could consider saving more. "Her first choice should be a monthly savings plan in an Isa wrapper, thus making any returns tax-free," Mr Jackson adds.

Mr Boulger says if Ms Holland does have surplus money, she should put it towards paying off her debts rather than saving. This is because she would be better off saving the interest she is paying rather than putting the same money into a deposit account. "That said," Mr Boulger adds, "it appears that apart from her Scottish Friendly Savings Bond, she does not have any other form of 'rainy day' money, because bonds from friendly societies tend to be longer-term investments, normally 10 years. This means she will not have easy access to this money should she need it for emergencies." Mr Boulger recommends putting money into an instant-access account.

Mr Rayner questions the use of a bond as a savings vehicle. "When making investments outside the pension Ms Holland should look at other products such as unit trusts or OEICs (open-ended investment companies) as an alternative."

Solution 2: Mortgage

Mr Jackson admits Ms Holland's mortgage is at a good rate, but feels there are better deals. If she does decide to switch, she should check that her present mortgage doesn't have redemption penalties.

"Ms Holland has a mortgage that is part-endowment and part-repayment. Whether she should continue with her endowment policy depends upon various factors, which include how long it has been running and who it is with," Mr Jackson says. "An option would be to surrender or sell her policy and convert the mortgage so it is completely repayment, or the part that is endowment could be changed to an Isa."

Mr Boulger says there are so many low-mortgage deals available it is certainly worth Ms Holland's time to see if she can remortgage to a better one. It may also be an idea to look into the types of mortgages available. "Given that interest rates are predicted to rise, Ms Holland may secure peace of mind in considering a fixed- or capped-rate deal," Mr Boulger adds.

Ms Holland probably will not save a lot by switching, but she will have the benefit of interest rate security. Mr Boulger recommends two deals: the Co-op's 4.99 per cent fixed and Coventry's capped-rate 5.99 per cent. Mr Rayner also recommends the Co-op deal.

Solution 3: Debts

Ms Holland has two debts, her student loan and her car loan. The student loan offers a great rate, so it would be silly to switch. All the advisers agree on this.

Mr Boulger advises Ms Holland to pay off her car loan first. "Before doing this she should check if she will face any charges for early or over payment to her loan." He also thinks she should shop around for cheaper loans and decide if it is worth paying the charges to get rid of her existing loan. "If the penalty equates to more than her remaining monthly payments, she is better off sticking with the car loan," he adds.

Mr Jackson says as far as the car loan is concerned Ms Holland could shop around but she will probably face charges for paying it off early or refinancing it. So unless she is paying a high rate, she should continue with this loan "until it runs its course". Mr Rayner thinks Ms Holland could consider a consolidator who would charge a lower rate for combining the debts, but the total debt is relatively low anyway.

Solution 4: Pension

The advisers also agree that Ms Holland's decision to opt out of Serps was the best. Mr Boulger says this allows Ms Holland to control her pension, rather than relying on contributions being made to the state, which is determined by the Government. "The value in real terms of the state pensions has been falling and it is impossible to predict what they will do by the time she retires."

Mr Rayner says Ms Holland's opt-out of Serps is risk-related. "If she is prepared to invest in equities and has a balanced risk profile then this remains a positive decision," he says. Mr Jackson suggests Ms Holland stays where she is for the time being and consider opting back in later.