Wealth Check: 'I want to buy out my key worker loan in the New Year'

Adella Habib bought her one-bedroom flat three years ago through the key worker scheme - she qualifies as a social worker. The flat cost £137,000 and she borrowed £101,000 from Halifax - its introductory offer ends in March. The rest of the purchase price was a loan from her Housing Association. This debt is interest-free, but Adella has to share any house price gains with the association.

Since Adella moved in, the property's value has increased to £180,000. She wants to remortgage to buy out the key-worker loan. If house prices keep rising, this could be her last opportunity to do so.

We asked three independent financial advisers for their suggestions: Ian Black, of Black Financial Planning; Caroline Hawkesley, of Evolve; and Rebecca Jones, of Music Media IFA.

Case notes

Adella Habib, 32, social worker, London

Personal: Adella is a mental health social worker earning around £33,000 a year.

Savings: £5,000 in individual savings account (ISA) with Halifax Bank.

Debt: £800 on credit card.

Property: Bought flat in 2004 using the Government's key worker scheme. The property is now worth £180,000 and Adella has a Halifax mortgage on it that ends in March.

MORTGAGE

Adella should in theory be able to remortgage in March and buy out her keyworker loan, but it will be a close-run thing, says Rebecca Jones. Based on the current valuation, Adella will owe her housing association just over £47,000. Adding that to her £101,000 mortgage would take the whole loan to £148,000, with monthly repayments of £875 on a repayment mortgage at 5 per cent.

If Adella wants to make this sort of commitment she will need to find a lender willing to offer this much.

Caroline Hawkesley points out that Adella will be asking for a loan worth 4.5 times her salary, which is on the high side. She suggests Adella finds a lender that looks at affordability, rather than straightforward salary multiples. It's also worth stressing Adella's secure employment in a responsible job.

Above all, Adella needs to do some sums. Ian Black points out that she currently spends her entire monthly income. Her outgoings would rise if she goes ahead with the remortgage, so she will need to think about cutting back spending, as interest rates could rise.

One option would be an interest-only mortgage, on which the monthly repayments would be £615 a month. But Adella would have to make concrete plans about how she will repay the debt in the long term.

SAVINGS

Adella's £5,000 cash ISA with Halifax is a good emergency fund, the advisers say. All of them accept it is not realistic for her to add to her savings right now, but warn her to monitor the interest rate to be sure it remains competitive. Less than 5 per cent would be a poor deal in the current environment, Hawkesley says.

One related area is debt. Black wants her to keep a close eye on the £800 credit-card balance - once the interest-free introductory offer on it comes to an end, she will need to transfer to a new deal. If not, Adella should consider paying the whole balance off - otherwise she will be paying more interest on the debt than she is earning from Halifax.

The good news is that Adella is a member of the Local Government Pension Scheme. If she remains in this final salary plan until retirement, she can expect a very decent pension.

OTHER ISSUES

Black points out that Adella has no insurance in the event that she falls sick and is unable to work for an extended period. This leaves her vulnerable, so arranging protection should be a financial priority for her.

Hawkesley also wants Adella to write a will, which will cost her very little. Although she has no dependants, it is still important that she makes it clear in a written document how she would want her assets distributed.

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