Wealth Check: 'With debts, can I save?'

Kristian Turner, 26, a marketing manager from Cambridge, has just got a foot on the property ladder. He and his partner, a doctor, have just bought their first house, worth around £300,000. But despite earning a combined salary of £70,000, the purchase has seriously depleted their savings, and Kristian still has debts: as well as owing £10,000 in student loans, he also has a £10,000 graduate loan from HSBC to pay off.

His mortgage is interest-only for the foreseeable future, and although he has paid into a final-salary pension for six months, he doesn't have any life insurance or income protection.

Kristian's goal is to clear his student debt, then build up a portfolio of property investment to offset his debt. He would also like to buy a second property "fairly soon", but wants to save more and is at a loss about how to do so.

We asked three financial advisers for their advice: Jason Witcombe of Evolve Financial Planning; Kevin Tooze of Equity Partners UK Ltd; and Keith Churchouse of Churchouse Financial Planning Ltd.

Case notes: Kristian Turner, 26

Income: £70,000 with partner
Pension: final-salary into which he pays £240 a month
Savings: Around £5,000
Property: Flat worth £300,000
Debts: £260,000 interest-only mortgage, £20,000 in student and graduate loans

MORTGAGE AND DEBTS

Interest-only mortgages can be useful for the self-employed or those whose income is bonus-driven, says Witcombe, but the discipline of a repayment mortgage is best for most people.

Tooze calculates that on a 25-year interest-only mortgage now at 5.98 per cent, his monthly interest payment would be £1,295, while a repayment mortgage at 5.98 per cent over the same term would be £1,672 a month. "Although this is £377 more per month, you are assured of owning the property at the end of the term," he says. "An interest-only option still requires a long-term investment to pay off the borrowing, otherwise the sale of the property is necessary to meet outstanding debt."

As for his other debts, Churchouse recommends that Kristian repay the £10,000 HSBC graduate loan first because of the higher interest rate (8.9 per cent compared with 4.8 per cent). Then that he contact the Student Loans Company to overpay his student loans with the payments he would have used for his graduate loan.

SAVINGS

Churchouse says that Kristian can still put himself in a position to save in the future, once his debts are more manageable. "I recommend that he maintains deposit funds of around three to six months' income for emergencies, and suggest that £3,000 of this is held in a cash individual savings account (ISA)," he says. "The rest should be held in a high-interest instant-access deposit account. Check the rates available for internet accounts as these are usually more favourable."

PENSIONS AND INSURANCE

"Kristian is lucky to have a final-salary pension," says Churchouse, but his debt repayment should take priority over extra contributions. Tooze recommends that he consider taking out life cover: cover of £280,000 over 20 years would cost £13.50 a month, and would probably provide his partner with greater security.

To find an independent financial adviser in your area, visit www.unbiased.co.uk

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