Isabelle Campbell and her husband, Jason, face a dilemna common to many young
couples. Both are in good jobs, in accountancy and teaching respectively,
and their joint income is a healthy £60,000 a year.
But a combination of Isabelle’s debts from her student days and the couple’s
scramble to get on the property ladder has left their finances stretched.
Isabelle, 23, says: “We want to have children but cannot see how we would be
able to afford it.”
The biggest hole in their budget is the monthly payment on their £190,000
interest-only mortgage with Scottish Widows. Their two-year deal, taken out
in January and fixed at 5.74 per cent, takes £900 out of their joint net
monthly income of approximately £3,500.
What’s more, Isabelle and Jason, 34, had to take out a 100 per cent mortgage
to secure their two-bedroom flat on a riverside development in Woolwich, in
southeast London, now worth an estimated £225,000.
Isabelle says: “My biggest concern is how we are going to pay off our
mortgage. It horrifies me to think that at the end of the mortgage’s 25-year
term we could still owe £190,000.”
Overpayments of up to 10 per cent a year to cut the mortgage debt are
permitted, but only after the initial two-year term ends in January 2009.
One way for the couple to ease the financial strain is to cut down on their
monthly outgoings of about £3,100. Apart from the £900 mortgage payment, the
biggest monthly outgoings are a £500 contribution to a cash Isa, £300 on
food, £200 on repayment of a work loan, £200 on socialising, £120 on coffee
and lunches and £100 each on train travel and hire purchase payments on the
couple’s car, with a further £30 a month on petrol.
Council tax, service charges for the flat, electricity and phone bills soak up
£400 between them, with the biggest bill being £90 for the couple’s mobile
phones. Other monthly outgoings include £15 for the internet, £15 for
magazine and film subscriptions, £12 for a TV licence and £42 for Isabelle’s
gym membership. She adds: “I also spend on clothes and shoes, though I can’t
easily quantify it.”
She and Jason are keen to start saving and have £2,000 in a cash Isa, but most
of this will go towards paying off a planned Christmas holiday to Thailand.
They are uncertain whether to keep saving £500 a month in an Isa or to use
the money to pay down Isabelle’s debts.
She has a student loan of £12,000, an interest-free loan of £5,500 from work
and £500 from her parents, a £1,300 debt on her credit card and a £1,000
interest-free overdraft on her student current account. “I tend to max this
each month,” she says.
Isabelle adds: “The interest rate on my credit card is greater than I earn on
my Isa, but the other loans are interest-free. Should I pay them all off
before I save any more, or should I keep up the savings habit?”
The couple’s only long-term savings is the £190 a month that Jason contributes
to his teacher’s pension. Isabelle has not signed up for the stakeholder
scheme offered by her employer because cash is so tight.
Both are ready to contemplate long-term investments that are slightly
higher-risk than their cash Isas.
Financial CV
Earnings: £60,000
Savings: £2,000 in a cash Isa.
Investment: None.
Pension: Simon pays £190 a month into the teachers’ pension scheme.
Isabelle has no pension provision.
Objectives: To work out a way to ensure that their mortgage is paid off
at the end of the 25-year term. To trim outgoings to create some spare cash
for investment. To strike the right balance between saving and clearing
debt.
The Campbells: what the experts say
INVESTMENT
Danny Cox, Hargreaves Lansdown
“Isabelle and Jason should continue to build savings through their cash Isa.
There is no tax on the interest and they can obtain good rates, such as the
6.3 per cent being offered by National Savings & Investments on balances
of more than £1,000. They could also set up an equity Isa and make regular
savings into it, ensuring that they stay within the current annual limits of
£3,000 for cash and £4,000 for stocks and shares. Equity income funds work
well for long-term savings and my favoured funds are the Invesco Perpetual
Income, Jupiter Income and Artemis Income funds.
“Jason has done the right thing by joining the teachers’ pension scheme, but
Isabelle should also start saving into a pension, even if it is a modest
amount. A contribution of £50 a month costs a basic-rate taxpayer only £39
after tax relief.”
Action plan
The couple should keep putting money into their cash Isa to build up a cash
reserve and check that they are receiving the best rates. They should also
start some equity investment within their Isa, putting money into equity
income funds. Isabelle should start saving for a pension, making modest
monthly contributions to a stakeholder plan.
DEBT
Anna Bowes, AWD Chase de Vere
“It is sensible for Isabelle to pay off debts that are costing more than the
interest she is earning on savings. It would also be worth thinking about
reducing debts that will soon start costing more, such as her student
overdraft.
“To clear her credit card debt, she could shop around for a 0 per cent
balance-transfer deal so that she is not wasting her repayments on interest
charges. If she pays off £110 a month, she could clear her card debt within
a year.
“I am a little concerned that Isabelle thinks her student loan is
interest-free. Interest is charged at a rate based on the retail prices
index, which is 4.8 per cent for 2007-08.
“While paying off debts is sensible, it is important to keep up the savings
habit, too, even if only modest amounts.”
Action plan
Pay off debts but keep saving modest amounts.
Concentrate on paying down the debts that cost most – namely Isabelle’s credit
card and, soon, the overdraft on her student account.
Switch to a credit card that offers a 0 per cent balance-transfer deal
Remember the student loan is not interest-free.
MORTGAGES
David Hollingworth, L&C Mortgages
“The couple’s interest-only mortgage is a useful way of keeping down monthly
payments but they need to tackle the problem of repaying the capital. One
way to do this is to make overpayments on their mortgage. I think they will
find that they can make overpayments of up to 10 per cent a year with
Scottish Widows, even during the two-year fixed term.
“Overpaying, and thus reducing the size of the mortgage, is a good strategy
because it helps to build up equity in the property. Once the fixed-rate
period ends they could switch to a repayment mortgage which is guaranteed to
pay off the loan after 25 years.
“The alternative would be to set up a savings vehicle, such as an Isa or an
endowment policy, to pay off the mortgage, but there is always the risk that
the savings will not be enough to pay off the loan.”
Action Plan
Check if it is possible to make mortgage overpayments now.
Consider setting up a savings plan to pay off the home loan.
When the two-year fixed term ends, think about switching to a repayment
mortgage that is guaranteed to clear the debt by the end of the term.
BUDGETING
Julie Lord, Cavendish Financial Management
“First, income of £3,500 and outgoings of £3,100 is better than the other way
round. However, Isabelle and Jason should look at their lifestyle. For
example, if they do not use the car much, they should sell it and hire a car
when necessary. They should stop spending so much on coffee and lunches –
making up a lunchbox and a flask will save them nearly £1,500 a year.
“Isabelle needs to get a grip on her clothes spending – cheap is cool these
days, to judge by the celebrity magazines, and she should set a budget for
clothes spending each month and not exceed it.
“They can cut their socialising costs by entertaining more at home rather than
eating out.”
Action Plan
Sell the car if it is not used much.
Swap lunches and coffee for homemade sandwiches and a Thermos flask and
entertain at home.
Isabelle to set a strict budget for clothes and shoes.
LINKS
Hargreaves Landown: 0117 9009000, www.hargreaveslansdown.co.uk
; AWD Chase de Vere: 0845 7959112, www.awdplc.com
; London & Country Mortgages: 0800 95333034, www.lcplc.co.uk
; Cavendish Financial Management 02920-665588.
Isabelle and Jason’s response
“The experts’ thoughts on budgeting are all common sense and we try to follow
them. One of our biggest expenses is the car and I will think about not
replacing it once my HP agreement ends.
“I will pay off the credit cards as soon as possible and then set up a direct
debit to make regular savings into a cash Isa. I intend to look at the
National Savings & Investments Isa, as suggested, and close our current
Isas with HSBC, which are less attractive.
“I am comfortable with paying off my student loan through PAYE, even though it
will take years, because I feel it was necessary to get me where I am today.
And though I know that pension contributions are important, I have decided
that I won’t start contributions until I have passed my exams, which should
be in about a year.”
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