Wealth Check: 'There's no cash to spare, so how do I buy a home?

The problem: With a £26,000 debt, it's hard to save

Nazmin Subhan, 26, from Ilford in Essex, is keen to get on to the first rung of the property ladder, but with £26,000 worth of debt to contend with, this seems a distant dream.

Alongside £18,000 in student loans, she owes £2,000 on an HSBC MasterCard, with interest charged at 15.9 per cent, and has a £6,000 personal loan with HSBC at an annual percentage rate (APR) of 7.9 over five years.

"The loan was taken out to get rid of my overdraft and half of my credit card debt," she says. "Repayments are £130 a month on top of my other debts, rent and living expenses."

While Nazmin would like to save towards buying her first property, she realises this is not a priority.

"I want to get back to zero as soon as possible so that all the money from then on will be mine - and I won't have to worry any more," she explains. "At that stage I can look into buying a house."

Nazmin earns £17,000 as an account executive for a marketing company promoting films. She has been working since she left Lincoln University last September, where she studied public relations.

So far, she has not managed to build up any savings - but she is keen to remedy this.

"I don't have any spare cash to put aside after paying off my debts and living costs," she says. "But I know I will have to start some time if I am ever going to get a foot on the first rung."

Nazmin pays £450 a month to rent a room in a three-bedroom house. She is not contributing to a pension and has no protection policies in place.

"I would consider a pension if I had the money," she adds. "I would also like to be in a financially sound position when I am older - for both my [future] partner and children."

The cure: Step up repayments but try to start a pension

Nazmin's priority should be reducing the level of her debt, and not taking on any further borrowings, says Anna Sofat of independent financial adviser (IFA) AJS Wealth Management.

"It's good that she has identified getting rid of her debt as her number-one priority - and that she is not looking to rush into home ownership."

Ms Sofat adds that Nazmin also needs to take action for her longer-term financial security. "Although this might seem to go against her priority of repaying her debts as soon as possible, I would strongly urge her to make a start on saving for retirement."

Debts

Daniel Clayden of IFA Clayden Associates says that as the interest she pays on her debts will be higher than the interest earnt on any savings she might make, Nazmin should use as much of her monthly disposable income as she can to reduce these.

He recommends she focus on repaying the most expensive debt first - the £2,000 on her MasterCard - and suggests moving this sum to a card offering an introductory 0 per cent deal.

But he warns that many providers offering this type of incentive charge a transfer fee for doing so, and this needs to be balanced against the potential interest saved.

Once Nazmin has dealt with her card debt, she should try to increase the repayments on her HSBC loan and clear it as quickly as possible, says Ms Sofat.

Another approach, says Keith Churchouse at IFA Churchouse Financial Planning, would be for Nazmin to move her loan to a new provider offering a lower interest rate (such as Northern Rock at 5.8 per cent). But he warns her to check that there are no redemption penalties for leaving the five-year HSBC deal ahead of time.

As the interest rate on student loans is low and linked to inflation (it is currently 3.2 per cent), Nazmin can continue paying this off gradually at around £15 a month, adds Ms Sofat.

Savings

Once Nazmin feels that her debts are under control, she needs to think about putting some spare cash aside in an "emergency" fund for unexpected events such as loss of employment.

"As a target, she should be looking to save between three and six months' salary in an instant access deposit account," explains Mr Churchouse. "You should be able to find providers with accounts offering 4.75 per cent or more - such as the internet deal from ING Direct."

Ms Sofat recommends she also look to open a tax-free mini cash individual savings account (ISA) for any reserves she wants to accumulate for the short or medium term, and picks out a cash ISA from National Savings & Investments that currently pays 5.55 per cent.

Property

When she is in a better position to do so, Nazmin should look to save a deposit of at least 5 per cent of a target property's purchase price, as this will enable her to obtain a far more competitive rate than if she opted for a 100 per cent mortgage.

Retirement

In the first instance, Nazmin should find out if her employer runs an occupational pension scheme, and whether it will make contributions on her behalf, says Mr Churchouse.

If not, she should consider setting up her own low-cost stakeholder plan. "By putting just £50 a month into a pension, this sum will be increased to £64.20 as she will get basic-rate tax relief," says Ms Sofat.

Ideally, she adds, Nazmin should be looking to contribute between 10 and 15 per cent of her salary each year to a pension, but she accepts this may not be realistic at present.

"If she starts now, the pain will be a lot less than if she delays for another five or 10 years."

Protection

As Nazmin has no dependants, there is no need to take out life insurance. If in the future, however, she needs to protect the interests of a partner and children, any mortgage should be backed by a life policy, says Mr Clayden.

He recommends she check what life cover and sick-pay benefits are provided by her employer before considering income protection and critical illness policies.

Interview by Harriet Meyer

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