Wealth Check: 'I'm worried about the negative equity trap'

Lee Dale, 24, from Bathgate, West Lothian, has just started his first graduate job in engineering. He has a good salary and has recently bought a house with his partner, but Lee has significant unsecured debts from student loans to credit cards, and very little savings.

“It’s so easy to put purchases on my credit card, especially when you can easily get limits of as much as £6,000 a card,” he says. “I think it’s irresponsible of the banks, but I’ve just bought a house so the financial climate is very important to me. Meanwhile, negative equity is a real concern.”

Case notes

Income: Lee earns £36,000 a year
Monthly outgoings: £700 in tax and national insurance, £380 on a mortgage, and £200 on food, travel, and bills.
Savings: He has an ISA worth £1,000 and saves £100 a month.
Pension: Lee has a final salary pension scheme that he expects to pay around 1.15 times his salary in annual retirement income if he stays with the company until he retires
Debt: £12,000 student loan, £3,000 on credit cards, and £1,000 overdraft.
Mortgage: Lee recently bought a house and owes £152,000.

Three independent advisers help Lee with his financial concerns: Kevin Anderson, of Budge and Company, Darius McDermott, of Chelsea Financial Services, and Colin Rothery, of Throgmorton Financial Services.

Savings & investment

The advisers agree that Lee's lack of financial buffer could be a problem in uncertain times. "Lee should try and maximise his tax efficient savings such as his ISA," says Anderson. "He has an allowance of £3,600 every year and should seek to achieve this.

"He may also wish to consider putting monthly savings into a stocks and shares ISA, which over the longer term smoothes out the bumps in the market."

"Lee must put all ideas of investments and savings on hold until he has cleared his debts," McDermott says. "Then he should set up an emergency cash buffer worth around three months of his wages, and only then explore possible investments."

Debt

Lee's debt problems and concerns are fairly typical of his age group. "Lee has to decide whether to progressively reduce his debts while still enjoying being young, or reduce his spending to a minimum and repay whatever he can as soon as possible," says Rothery.

If the latter, Lee should work out which of his debts are the most expensive and pay them off in that order. He should also try to negotiate a reduced or free overdraft with his bank.

"Lee has landed secure employment in a company where there is plenty of room for career progression," adds McDermott. "If he can climb the ladder then his financial woes will be eased considerably."

Pension

Lee is in an enviable situation when it comes to his pension. "He has a fantastic pension of a kind that is almost unheard of these days," says McDermott. "But if he expects a decent retirement income, he will need to work on increasing the contributions. "One thing he should bear in mind is that his pension pot could have tax to pay if it is greater than the lifetime allowance. For the current tax year, the limit is £1.6m," adds Anderson.

Property

Newly a homeowner, Lee has been alarmed by the sustained drop in the housing market, but though he needs to be careful longer term, his current situation may not be as bad as he thinks. "Lee has just purchased a property on a very attractive one year fixed rate," says Anderson. "He is concerned about negative equity but this is usually only a problem if he wants to sell the property. He may have problems when he comes to re-mortgage because his loan to value is so high. That may mean he is forced onto his lender's standard variable rate."

Protection

While Lee already has income protection, Rothery advises considering life and critical illness cover for his mortgage. But before he does, Anderson suggests Lee should check what his employee entitlements are. His pension scheme will almost certainly provide some form of life assurance while he is working for the company.

For a free financial check-up, write to Wealth Check, The Independent, 191 Marsh Wall, London E14 9RS; or email wealthcheck@independent.co.uk