Wealth Check: In a hurry to wipe out the home loan and 'enjoy family life'

The problem: Is it realistic to save more and slash debts?

With a newborn baby to consider, Steven Keable and Sarah King from Leiston, Suffolk want to try a juggling act and start saving for the future while reducing their debts.

Steven, 29, who works as a production technician at a nuclear power station, and Sarah, 26, a learning support assistant, take home a combined income of around £3,500 a month.

However, Sarah is currently on leave for baby Dexter, now four months old, and is only on £104-a-week maternity pay.

The couple have built up £3,400 in a mini cash individual savings account (ISA) with Norwich and Peterborough (N&P) building society, paying 4.3 per cent interest. And they recently opened a Headstart savings account with the same provider offering 4.55 per cent.

But Sarah has also run up debts that she is keen to pay off. These include £8,000 in student loans, an £800 overdraft on her current account with HSBC - at a rate of 14.8 per cent - and a £2,500 loan from her parents on which she doesn't pay interest.

The couple bought their three-bedroom house for £76,000 in 2003; its value has risen to around £130,000. They want to pay off their home loan as soon as they can. To this end, they have switched from a regular 25-year loan to a 10-year tracker mortgage with Nationwide building society. At an interest rate of 4.74 per cent, their loan repayments cost £715 a month, says Steven.

"We want to repay the mortgage quickly to enjoy family life without the monthly financial burden," he explains.

The couple were pleased to receive a helping hand from the Government when Dexter was born - in the form of a £250 child trust fund (CTF) voucher. They opted to put their voucher into a stakeholder CTF offered by N&P, and save £20 in this account each month.

Both Steven and Sarah contribute to final salary pension schemes, and while their respective employers offer some life cover, neither has any other protection policies in place.

The cure: A shorter mortgage was the wrong option

Clearing debt is a priority in any sensible financial plan, says Warren Perry from independent financial adviser (IFA) Churchill Investments, but the couple have too much focus on the mortgage. Reducing their monthly repayments could help pay down debt elsewhere, he explains.

For a young couple, stock market investments offer the potential for strong returns in the long term.

Property

The mortgage switch may be straining their finances, says Mr Perry. Increasing the term to 20 years should free up some valuable income to cut Sarah's debt, contribute to Dexter's fund and enrich family life.

"Children are an expensive business. The couple may find that extra income becomes vital."

Debts

Sarah's priority should be to clear her overdraft, says Justin Modray of IFA BestInvest, since interest on this is much higher than that levied on the student loan (3.2 per cent).

Savings

Although the rates currently payable on the couple's N&P accounts may not be the most competitive, says Mr Perry, there is a lot to be said for their easy access to the cash in an emergency.

He suggests, though, that they monitor other deals on the market, especially internet accounts.

Mr Modray says they should consider moving their money to the Halifax's mini cash ISA, currently paying 5 per cent. "This will earn them a little more interest than their current ISA - although, of course, there is no guarantee it will stay competitive."

Investments

Mr Modray thinks the couple should consider saving into a stock market-based investment. "Although more risky than cash, it gives potential for better long-term returns," he says. "A fund with exposure to global stock markets, such as Jupiter Merlin Growth, would be a good starting point." This could, he adds, provide a nice nest egg to help Dexter through university.

Retirement

Both Steven and Sarah are very fortunate to have access to final salary pension schemes, says Mr Modray, because the employer, not the employee, has to shoulder the investment risk.

But he warns that final salary schemes are a "dying breed" and says the couple may find their pension arrangements change in the future. The Co-op and Rentokil Initial are among big employers to have recently announced alterations to final salary deals that will leave staff needing to save more and work for longer if they want to retire on the same benefits.

Sarah should also check the level of pension entitlement she is accruing on maternity leave.

Protection

Insurance should be a priority for a young family, says Alex Pegley from IFA Calculis. "How would they survive if they lost one or other of their incomes - or if they needed to fund full-time childcare?"

Mr Modray points out that although Sarah's pension scheme usually pays out a lump sum of two times salary if she dies in service - and Steven's employer pays three times salary - they should ask if this is enough.

"They could look at [basic life insurance]: this is a cost-effective way to provide cover."

If Steven is the main earner now, adds Mr Perry, he could also look at critical illness cover.

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