Wealth Check: 'Home ownership wiped out our savings'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

The problem

Three weeks ago, Nicola Hitchcock and her husband Paul had £25,000 in savings. Now they have barely £50.

"We managed to save up a deposit and, with help from our parents, finally bought our first house two weeks ago," says Nicola. "But unfortunately, we've been wiped out financially."

The couple purchased their £182,000 home in Worthing, near Brighton, with a £132,000 tracker mortgage from Abbey. Interest is set at 0.11 per cent below the Bank of England base rate (currently 4.75 per cent) - a low rate for which they qualified because their deposit was more than 25 per cent of the value of the property.

The couple would have liked a repayment mortgage but opted for an interest-only deal because it was cheaper. Nicola explains: "Ideally, we will be able to sell up and move on in a few years, and then use the money we make to switch to a repayment deal on the next house."

The Hitchcocks hope their current low-rate mortgage will enable them to put cash aside to build up both their general savings and a deposit for their next property. They calculate they could save £700 a month.

"We're sure an individual savings account [ISA] is the best way to go about doing this," Nicola says, "but we're not sure the high rates are all they're cracked up to be: most seem to be bonuses that disappear after six months."

Nicola is also considering putting a small amount of money in the stock market.

"We are horribly aware that we've bought our house when prices are high - and that, at the same time, we have no investments when share prices seem to be at a low," she says. "So we'd like to put some money into the stock market now to see if we could benefit in the future."

For four years, Nicola has been paying 6 per cent of her salary into her employer's final salary pension scheme.

Paul is applying to join the police and has yet to take out a pension, but if accepted by the force, he should benefit from his new employer's scheme.

The Hitchcocks have yet to buy life insurance. They were invited to purchase a host of "protection" products with their mortgage but chose not to, in order to shop around instead - something they have still to do.

Interview by Sam Dunn

The patients

Nicola and Paul Hitchcock, both 29, from Worthing, in West Sussex.

Jobs: Nicola is a transport manager for West Sussex county council; Paul is applying to join the police.

Income: combined salary of up to £43,000.

Savings and investments: none.

Goal: to replenish their savings and build up a deposit to buy their next home.

The cure

Nicola and Paul may be cash poor but Philippa Gee of independent financial adviser (IFA) Torquil Clark thinks their decision to save £700 a month shows good financial sense.

There are good mini cash ISAs out there if you look for them, says Justin Modray of IFA Bestinvest.

If they want to invest any spare cash, the Hitchcocks should consider using an online fund supermarket, says Kevin Anderson of IFA Budge & Co.

Property

Ms Gee is not a fan of interest-only mortgages. Many people take out these loans with the aim of switching to a repayment deal, she says, but then "stay put and, five years later, have still not moved". But given the Hitchcocks' circumstances, she suggests putting £200 (of the available £700 a month) into a high-interest savings account. This will help them build up a deposit and, when they next move, switch to a repayment deal.

Savings/investments

As for the remaining £500 of monthly savings, Ms Gee suggests putting £350 into a mini cash ISA and £150 into a mini equity ISA.

Mr Modray likes Abbey's mini cash ISA, which pays 5.35 per cent interest. "It doesn't include a short-term bonus that vanishes in a few months."

To open a mini equity ISA, Ms Gee advises the couple to choose an online fund supermarket. This will allow them to spread the risk across different funds. Those worth considering include Schroder Income, Artemis Special Situations and JPMF UK Strategic Value, she adds.

However, Mr Modray thinks they should invest in a single global fund.

"Within their [monthly investment] allowance, it's important to achieve wide geographic exposure and a split between large, medium and small companies," he says.

"It would be more practical to consider using widely invested funds such as Jupiter Merlin Worldwide or Artemis Global Growth, rather than try to build a portfolio with small amounts invested in a wide range of funds."

Retirement

Nicola's employer and Paul's prospective employer both offer decent pension schemes, says Mr Modray, who adds: "There is probably no pressing need to boost their pension provision at present."

Protection

Life cover for the couple's new home is an urgent consideration but they may not need to look much further than their employers, says Ms Gee.

"To avoid unnecessary costs, I would start by checking what employers provide [in the event of your death]. It's likely they will find they already have some of the cover they require, so additional policies may be a waste of money."

But if this cover falls short, it will be worth taking out "term" life assurance, says Mr Modray. This lasts for a fixed period and means the mortgage will be paid off if either Nicola or Paul dies during that time. "They should be able to get £132,000 of cover for 20 years for about £13 a month [or £20 if they are smokers]."

If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk