Another broken rung on the property ladder

Ladders

I helped out Independent on Sunday recently with its Wealth Check about Rove Mejia – an employee with a student loan – saving up to buy a property.

The case study made me think about the impact of debt on our young professionals.

Borrowing the maximum for a three year course produces a debt just of £50,025.  The repayments are £74.58 per month in this example (Rove earns £28,000).  That doesn’t sound too bad, but those payments are predicted to last well over sixteen years.  This affects how much graduates can borrow, for a long time, in two ways.

1 – Debts reduce mortgage capacity

You may be aware that when you take out a mortgage, any ‘ongoing’ financial commitments are deducted from your income.  In our example, the repayments go up over time, from £895 to £7,672 per year.  Repayments also go up when you get a pay rise above inflation, capped at £35,000.

It’s not surprising that mortgage lenders need to take that into account – it would hardly be ‘responsible lending’ to disregard that debt.  Fundamentally, the student loan repayment is an effective pay cut of at least the starting repayments.

It’s not quite a ‘blank cheque’ because the payment is capped at almost 4.9% of gross income.  That’s really 6.5% after tax.  In short, a long-term liability.

2 – Inflation doesn’t help here

Normally, if I take on a sixteen year loan, I don’t need to worry about the future costs, because I expect my earnings to rise with inflation.  Over time, I expect my income to rise so that £74.58 repayments take up an ever smaller share of my pay.

But.  My Student Loan Company interest rate is set at the lower of the Retail Prices Index or 1% above the Bank of England base rate.  This means that my payments will increase when inflation increases because the cost of repaying the loan is linked to inflation.

In short, a long-term real liability. Even more worrying, for imminent graduates, is the realisation that a sustained period of fairly high inflation would help get rid of our budget deficit.

For me, this proves that debt is never healthy for good financial planning.  I have heard the argument that it’s worth taking the student loan because the rate is so low.  I’ve never been in favour of this.  This real-life example demonstrates some of the hidden pitfalls.

Here's a little more information about our team:

Q: Qualifications Include

A: My degree in modern languages included a module on economics and personal finance, and that's how I got into financial planning.

Since then, I've become dual qualified as both a Certified Financial Planner and a Chartered Financial Planner, including the specialist qualifications in Tax & Trusts (G10) and Pensions (AF3/G60).

The full list is:

AF3 - Pensions (CII) (I did that to totally update my pension knowledge, as I had done G60 in 1994.)
K10 - Retirement Options (CII)
K20 - Pensions Investment Options (CII)
G20 - Personal Investment Planning (CII)
Chartered Financial Planner (CII)
ER1 - Equity Release (CII)
HR1 - Home Reversion Plans (CII)
G10 - Taxation and Trusts (CII)
CFP - Certified Financial Planner Licence (IFP)
H15 - Supervision and Sales (CII) 

In November 2016 I added the STEP (Society of Trust and Estate Practicioners) Certificate for Financial Services.

Q: Do your clients have anything in common with each other?

A: They are all lovely and there are a few similarities in their aims that I've noticed. 

Many of my clients want to do more than just meet their own needs. They also see themselves as custodians of their money for the next generation or for other beneficiaries. 

In other cases, their aim is to manage their wealth efficiently during their lifetime, with the aim of spending it all… but minimising tax on the way there.

Q: What type of work do you enjoy most?

A: I do get a real sense of satisfaction from the work with those clients who engage me to manage the needs of two generations of the same time. That can be 'just' a long-term and balanced investment strategy or it can be trust planning and estate planning to avoid paying too much Inheritance Tax.

Q: Where would you be right now if you weren't at work?

A: In the Lakes

Q: In the film of your life, who would play you?

A: In my head, it's Uma Thurman, but I expect they would approach 'Nursey' from Blackadder II.

Q: Curry or Hot Pot?

A: Agh, too difficult. Curry.

Q: Sherbert or Chocolate?

A: Chocolate

Q: Lawn or Flowers?

A: Lawn

Q: What are you most likely to do whilst being 'on hold'?

A: Infuriate my colleagues by opening conversations then cutting off their reply when my call is answered.