Wealth Check: Time to give up the new cars and luxury holidays

Tim Brierly, 23, is a car sales executive in Hampshire, earning £25,000 a year inclusive of commission. He rents a home with his partner, who earns £15,000 as a trainee accountant. They hope to buy a home in two years for about £140,000.

Tim Brierly, 23, is a car sales executive in Hampshire, earning £25,000 a year inclusive of commission. He rents a home with his partner, who earns £15,000 as a trainee accountant. They hope to buy a home in two years for about £140,000.

Tim is concerned that he doesn't have much money to put towards a deposit and that his savings fall short of £2,000. He's putting £20 a month towards a pension and "would like to continue living at whatever standard I have reached at that time".

We put Tim's circumstances to Andrew Merricks at Skerritt Consultants, John Mills at Westpoint Mortgage Management and Meera Patel at Hargreaves Lansdown.

Case notes

Tim Brierly, 23, car sales executive

Joint salary with partner: £40,000 (Tim earns £25,000, his partner earns £15,000 as a trainee accountant).

Pension: None, but Tim has been contributing £20 a month to a scheme.

Savings: Less than £2,000.

Property: Tim rents a property with his partner, which costs £635 a month, but they are hoping to buy a property worth £140,000 within two years. They are concerned, however, that even if they increase their savings, they will have no money to put towards a deposit, and will only be left with just enough to cover their costs.

MORTGAGE

Merricks is optimistic that Tim and his partner can buy a place now, worth £140,000, without the need for a deposit. Northern Rock offers a 100 per cent mortgage, but they would need to have saved enough for legal fees, survey, stamp duty etc. A mortgage of £140,000 would cost about £900 a month as a 25-year repayment or £680 a month interest-only.

The latter compares favourably with the rent they pay, but because it is interest only, they would not be repaying any capital. In a way, this is the mortgage equivalent of renting. Is it so important to repay capital from day one when it's a first property, as the strong likelihood is that a first home will not be the last? The relatively small amount of capital repaid in the early years of a repayment mortgage may not be cost-effective when they have to pay day-to-day bills.

The couple should check that their savings are at least attracting reasonable interest, and not the measly 0.1 per cent of some current accounts. To achieve anything a lot better may require an element of risk to be taken; not advisable for something as important as saving for a deposit.

The other unknown is whether their £140,000 property will still be worth that in two years' time. The fact that they can't afford the deposit now might go in their favour, as many expect house prices to have fallen by then. This makes the 100 per cent mortgage option a big risk should prices fall and they are left in negative equity. For someone who isn't prepared to take much risk, is buying at 100 per cent indebtedness the biggest risk of all?

Mills thinks a change of lifestyle is required for Tim. New cars, expensive holidays and lots of clothes should go on hold. He also recommends getting a credit report to ensure there are no nasties in the credit history. This can be done online or by post from the two big credit-reference agencies, Experian and Equifax.

Patel suggests that, with less than £2,000 in savings, Tim and his partner build up three to six months worth of income as savings for emergencies. They need to consider all eventualities. For instance, they need to question how they would survive if they both lost their jobs. Once their "rainy day" savings are in place, they should then start saving for a deposit on a house.

The average mortgage company would use 2.5 times joint income to calculate their ability to pay a mortgage, or three times an individual's salary. On their current income, they'd stretch themselves if they bought a £140,000 property now. However, Patel assumes that both incomes will rise over time and, with a deposit built up, a property in the region of £140,000 in a couple of years' time seems realistic.

PENSION

Patel is pleased that Tim has been contributing a small amount to a pension. He has over 40 years to build a pension pot, but if he wishes to retire on a comfortable income, she strongly recommends that he increase his pension contributions sooner rather than later. On his current contributions, he should receive an annual pension income in the region of £3,300 when he retires. This calculation is based on his current contributions, a retirement age of 65, an annual growth rate of 7 per cent and charges of 1 per cent per annum.

Merricks disagrees, questioning whether it's worth Tim paying £20 a month into a pension. It could put towards the shorter-term requirement of saving for a house. The new pension rules coming into force next year will make it a lot easier for people such as Tim to catch up with their pension planning later (perhaps using an inheritance).

Mills thinks the couple are in a good financial position, with little debt and good incomes. He advises creating a savings plan with short-term goals and rewards for achieving them. The savings should go into a deposit or building society account. An online one is preferable as small sums can be moved easily. A minimum withdrawal period will stop him dipping into it on a whim and give a better interest rate.

For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk