Wealth Check: Debt clearance paves the way to a new home

Linda Biney, 26, moved from Bolton to Crystal Palace in south-east London, where she teaches English and drama, four years ago.

Linda's dad was so appalled by the state of her finances that he convinced her to start putting some money aside. She has taken his advice seriously and now pays £200 a month into an ISA and £400 a month into a Post Office savings account. At the same time, she has cut up her credit cards.

While Linda is burdened with an overdraft, a student loan and credit card bills, she hopes to clear her debts as quickly as possible and potentially become a home-owner in the near future.

We asked for help from Vivienne Starkey, of Equal Partners, Ashley Clark, of Need An Adviser.com, and Meera Patel of Hargreaves Lansdown.

Case notes

Linda Biney, 26, Crystal Palace, London

Personal: Linda, a teacher, is keen to repay debts, build up savings and buy a property.

Income: £27,000 a year.

Debts: £3,500 outstanding on post-graduate study loan with HSBC at a rate of 3.2%.

Pension: Teachers' scheme.

Monthly outgoings: Rent, £260; £200 for ISA, £400 Post Office savings, £116 student loan, £140 bank loan, £40 on credit cards.

Savings

Starkey points out that the interest rate paid by Linda's Post Office Easy Access Saving Account varies according to the balance in the account. It starts at 1.75 per cent on savings between £100 and £1,000, and rises to 4.3 per cent on balances worth more than £50,000. To get a better deal, Linda could switch to Chelsea Building Society's Rainy Day Savings. It pays 5.25 per cent on balances between £500 and £25,000.

Debts

Redirecting the £600 that Linda saves each month towards paying off her postgraduate loan would clear it in about six months, suggests Clark. This would release an additional £140 a month, plus £600 a month from month six onwards, to tackle the student loan.

Linda should consider switching to a credit card that offers 0 per cent on balance transfers for a limited period, he adds, recommending the Halifax One Visa. It has a 2 per cent handling fee on transfers, but then offers 12 months interest free.

Clark says repaying borrowing should take priority over savings because the interest rates charged by lenders are higher than those paid on most accounts. Assuming she can get a 0 per cent credit card, the postgraduate loan will be her most expensive debt, followed by the student loan.

However, Patel thinks Linda's credit card debt should be dealt with first, followed by her overdraft. Once these are cleared, she should start to pay off her student loan. Although student loans are a cheaper form of borrowing compared to credit cards, it is advisable to eradicate all debt as soon as practicable.

It is worth noting that any debt Linda has will go against her when she eventually applies for a mortgage, adds Patel.

Property

Patel acknowledges that, with the sharp house price rises, getting on the housing ladder has become increasingly difficult for first-time buyers. However, house prices are beginning to slow and this may work to Linda's advantage by the time she is able to buy a house.

Clark advises against buying a home while Linda has debts that limit her cash flow. He agrees that the property market is likely to remain fairly flat for the next two years and Linda is unlikely to miss out on the next growth cycle, due in about four years, he reckons.

Once her debts are clear, she can restart saving with added vigour, knowing that she is debt-free and planning to buy before the next boom. There are options for people who can't quite afford the property they desire, Clark adds. Linda should start looking into possibilities such as Housing Association schemes or shared ownership deals.

Pension

The Teachers' Superannuation Scheme offers pensions linked to Linda's earnings - it's an excellent scheme, most advisers agree. Clark suggests that Linda remains in the scheme: if she continues to teach for 40 years, she will receive a pension of up to two-thirds of her salary.

Starkey points out that the Teachers' Pension Scheme is being examined by the Teachers' Pension Review Group. A variety of changes have been proposed. There is some very useful information on the website www.teacherspensions.co.uk

Insurance

Starkey says that Linda's employer would continue to pay her if she was unable to work due to ill health, but she should check how long these payments would continue as they can vary between different authorities. With no dependants, she doesn't need life insurance.