Wealth check: 'Can I save when debt runs deep?'

Zoe Burgess's predicament is becoming a common one across the UK. As a first-time buyer, she turned to her parents to borrow "several thousand pounds" for a deposit. Now she must repay this, meet her new monthly mortgage payments and monitor a £3,000 debt racked up on credit cards to furnish her one-bedroom flat.

The problem

Zoe Burgess's predicament is becoming a common one across the UK. As a first-time buyer, she turned to her parents to borrow "several thousand pounds" for a deposit. Now she must repay this, meet her new monthly mortgage payments and monitor a £3,000 debt racked up on credit cards to furnish her one-bedroom flat.

"I have an arrangement with my parents to settle their loan with regular payments, starting at £50 a month, and then to pay off lump sums when possible - when I sell the flat or free up some money through remortgaging, for example."

Her £3,000 card debt is on a 0 per cent introductory deal with Virgin Money until June 2005. The sum was originally with Barclaycard and then switched to the Co-op (both now carry zero balances) before the recent transfer to Virgin. She will look to switch the debt again next summer - either to a new 0 per cent deal or a card with a low standard rate.

Buying a first property drained her savings account but she is keen to start again.

Zoe is six months into a two-year discounted £96,325 repayment mortgage with NatWest, a deal set at 1.7 per cent below the bank's standard variable rate. This SVR is currently 6.79 per cent, and her monthly mortgage payment is £522.

"I bought the flat in May for £115,000 but have no idea what it's worth now. I hope it's gone up, as I've been working hard to do up the interior."

There is no penalty for leaving the loan early, prompting Zoe to consider remortgaging as soon as possible. Her wages have gone up recently and she thinks she could get a better deal.

Her £96,000 Scottish Provident life policy on the property includes critical illness cover.

Zoe has recently changed job and can join her new employer's pension scheme, run by Standard Life. If she contributes 5 per cent of her salary, her employer will put in 10 per cent.

But she isn't convinced. After paying £60 a month into her old employer's pension scheme for nearly two years, she left the firm, taking just her own contributions - a £1,200 rebate. "Pensions seem costly, complex and don't appear great value."

The patient

Zoe Burgess, 28, lives in Brighton. Job: sales executive for a medical supplies company. Income: between £25,000 and £30,000 (including sales bonus). Savings: none. Investments: none. Goal: to find the best way to repay debts and start saving.

The cure: Cut the cards, take the pension

With a salary rise, Zoe should "explore the possibility of a remortgage", says Arnold Wills of independent financial adviser (IFA) A Wills & Co.

She may not have much faith in pensions but they are the most tax-efficient way of saving for retirement, says Matt Pitcher of IFA Towry Law.

Property

Zoe should get an informal valuation on her flat from a local estate agent, says Colin Jackson of IFA Baronworth. "If its value has risen or even only slightly edged up, she can probably get a much better loan deal.

"However, after taking the costs of a remortgage - arrangement and valuation fees - into account, Zoe will have to calculate whether the amount saved on the monthly payments will be enough to make it worthwhile."

Mr Pitcher thinks Zoe should consider moving only to a fixed-rate deal. "This would fix her monthly outgoings. She should look for an interest rate of 4.95 per cent for a two-year fix."

But Zoe shouldn't extend her mortgage to help pay off the loan from her parents, he adds. "Adding this debt to the mortgage will mean that, although she could get a low rate [with the new deal], she will be paying the debt off over a longer time."

Protection

As she has no dependants, Zoe's life insurance probably isn't necessary. "But she may wish to continue with critical illness," adds Mr Jackson.

Debts

Zoe should cut up her Barclaycard and Co-op cards now, says Mr Pitcher, and start to repay the £3,000 debt.

"If she decides to forgo her life cover and to remortgage, the savings she will make from this could be used to pay off part of the card debt each month," says Mr Jackson.

Pension/savings

The company scheme is worth investigating, says Mr Wills, particularly as her employer is offering a 10 per cent contribution. Zoe could put the £1,200 rebate into the scheme if she wishes.

However, Mr Wills says: "Rather than worry about pensions at this stage, Zoe could perhaps use the £1,200 to reduce her overall debt or as a cash deposit for emergency purposes."

If she does pay the cheque into the new fund, Zoe can get tax relief on the sum, says Mr Pitcher.

It is sensible not to rely solely on a pension for future financial security, he adds. "She should try to back both horses by saving regularly into an individual savings account [ISA] as well."

A mini cash ISA would be a sound start: it offers tax-free savings growth and will let Zoe gain access to her money without penalty.

Abbey's mini cash postal ISA currently offers one of the best rates, at 5.35 per cent.

If you would like a financial makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk