Many twenty somethings would be envious of Sara Turner's lifestyle.The 25-year-old has owned a two bedroom house since 2005, has a devoted boyfriend and recently landed her dream job in travel journalism after an “amazing” year touring India.

Moreover, for the time being she is living rent-free with her father to cut costs. All these advantages do not, however, add up to a worry-free existence. Sara's property is in Swansea, 200 miles from her father's home in Eastbourne, and she has had to put up with a string of bad tenants.

“I had to spend £1,000 getting the house into shape after one of them left,” she says. “The walls had been repainted an awful brown and a used nappy had been left in a cupboard.”

Sara bought the house three years ago for £91,000 - beating an asking price of £93,000 - and lived there through her final year at Swansea University, using rent from two flatmates to cover repayments on the mortgage. The property is now worth about £108,000, but Sara is concerned that this could fall in the slowing housing market.

Since October Sara has been on a two-year fixed-rate mortgage with Bristol & West. The rate is 5.99 per cent, giving repayments of £560 a month. Her brother, Peter, is joint mortgage holder, paying 10 per cent.

Rent from tenants brings in £460 a month and Sara adds: “I want to have some basic work done to convert it to a three-bedroom house. That would cost about £3,000 and would raise the rental value, but I'm not sure whether it would be enough to cover the payments. I would like to get that done as soon as possible but I have no idea where to go for a loan.”

Sara and her boyfriend, Jimmy, a 23-year-old student, plan to move to London in September to be nearer Green Park, where she works as a writer for Business Traveller magazine on a salary of £16,000. “We can probably afford about £500 a month each in rent,” she says. “I think that we would be best off renting for now given the reports of house price falls. Also, I don't know how we would get a mortgage.”

Current accounts with Nationwide and Halifax have overdrafts totalling £1,750. Sara has no investments and only £52 in an ING Direct Savings account. But she is keen to change this situation. “I hope to pay off my overdraft within two months,” she says. “Some advice on where to put the money I make after that would be extremely helpful.”

To clear her debt quickly, Sara is now living on the bare minimum and says: “I spend about £80 a month on groceries and £326 a month on my season ticket from Eastbourne to London. That, literally, is it. We don't really go out and I'm not spending anything on the usual things; books, music or whatever.”

Sara does not have a pension with her employer and would like to know whether this is something that she needs to address. “However, I don't see how I could afford contributions now,” she adds.

Once her finances are back in the black, Sara will have to budget for a host of everyday expenses, including broadband, phone and utility bills, travel within London and a social life.

She and Jimmy love to travel and would like to make another big trip within the next year or two.

Sara Turner: what the experts say

FINANCIAL PLANNING 1 Dennis Hall, Yellowtail

“Sara has made a paper gain of £17,000 on her property. Low interest rates and high property inflation have made it easy to borrow cheap money, invest in property and turn a profit. With conditions now swinging the other way, Sara's financial position does not appear strong enough to ride out the storm. The rental income does not cover her mortgage, let alone insurance and maintenance. Gaps between tenants will mean that she has to meet the repayments, and she barely has enough money as it is.

“If Sara stress-tested her finances, basically asking ‘what if', it is clear that her position could range from uncomfortable to impossible. If property prices fall as far as is being predicted, then Sara could be facing negative equity. If, on top of this,

she lost her tenants or her job, she would be in dire straits, even to the point where she may consider bankruptcy.

“My advice is to sell and be thankful for any profit. This isn't based on knowledge that the market will fall, but on the financial disaster that could await Sara if it does. She should also avoid pumping more money into the property. She cannot do it from her own resources and it would be reckless to borrow more. Nor can she afford to take on any additional commitments, including a pension. Reducing debt must remain a priority. After that, she needs to build a cash buffer - a cash Isa would be perfect.”

Action plan

Look at selling the property now.

Continue to repay debt and do not be tempted to increase it.

Use cash Isa to save a buffer fund.

FINANCIAL PLANNING 2 Andrew Collett, Evolve

“Sara should concentrate on saving while staying with her father and clearing her overdrafts. After this, she could start to save into her existing ING account. Although the 4.75 per cent gross interest rate is not the best on small deposits, it may be worth sticking with to save the hassle of opening a new account.

“She should look to save a sum equal to about three months' salary, say £4,000, as a rainy-day fund. She will also need to pay a deposit and one month's rent upfront when she moves to London, which will deplete her savings initially.

“Sara is not making enough in rent to cover the buy-to-let mortgage. This will drain her resources if it carries on, and being in London will make managing the property even more challenging if she encounters bad tenants. As for a loan to upgrade the property, she would need to be confident of meeting the repayments. With her finances already stretched, she will not want to be saddled with more debt.

“If she is unable to guarantee a rental that covers the mortgage, she could consider selling the property. If she can get a good price, she could use any equity to help to pay off her debts and have money to help to buy a property nearer London in the future. She should check any early redemption penalties on the mortgage, which might prove costly.

“Sara should not worry about pension saving; she has enough on her plate. The new flexible rules introduced in April 2006 mean that she can catch up later. But she should not leave it too long.”

Action plan

Pay off overdrafts before saving.

Save into existing account.

Consider selling property.

MORTGAGES

Jonathan Harris, Savills Private Finance

“Sara is fortunate to have fixed her buy-to-let mortgage last October at 5.99 per cent for two years, as rates have risen considerably as a result of the lack of liquidity in the market.

She is concerned about the property falling in value, but as long as she keeps it for the longer term, prices tend to recover.

“The obvious downside is that the rent is £100 a month short of the £560 mortgage repayments. There is also nothing spare to cover property maintenance or to build a fund to cover void periods. She needs to increase the rent, if she can, and adding another room should allow her to do this. The best way to raise the £3,000 for this work is a further advance from her lender. But lenders have different minimum requirements when sanctioning further borrowing, so she might need to consider a personal loan instead.

“With regard to moving to London, Sara and her boyfriend are unlikely to be able to afford a mortgage.They would need at least a 5 per cent deposit and she has no savings. Also, it may be worth waiting until prices hit bottom. It would make more sense to save for a deposit in a high-interest savings account and aim to buy in a few years' time when she is in a stronger financial position.”

Action plan

Review rental income.

Ask lender about further advance.

Start saving a deposit.

Sara's response

“The advice is helpful but it doesn't tell me much I didn't know. I think urging me to sell is an extreme reaction, though I agree that everyone is struggling. I hope they understand that I am cutting my spending to zero to cut costs.

“Saving up a rainy-day fund of £4,000, as suggested by Mr Collett, is a very good idea, though, and something I will definitely be aiming to do.

“I am now in the process of getting the £3,000 I need for the work on my house as an advance from my lender. Mr Harris mentioned that possibility. He also talked about not buying in London now, but that was never something that we planned on.

"I do think that the experts are right on holding out on the pension for the time being. I already have some contributions from a previous job.”

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