New year, new debts?
EASTERN DAILY PRESS - 22ND DECEMBER 2007
Many people believe that the new year is going to bring them new financial misery.
The crisis in the credit markets means that more borrowers are likely to be rejected for the best mortgage deals, and that could be compounded as more people come to the end of fixed-rate mortgages that were started when interest rates were much lower than they are today.
And as well as many borrowers finding that new deals are at higher rates, some people will find that they can’t take out new loans at all.
Research by Norwich-based Moneyfact.co.uk suggests that the number of residential sub-prime mortgage deals for borrowers with poor credit histories – has fallen by 64 per cent since July.
“If borrowers have overstretched themselves with an unaffordable sub prime deal, worse troubles could lie in store,” said Julia Harris, of Moneyfacts.
“Even if they can weather the storm and maintain mortgage payments until their deals expire, getting a new deal may become almost impossible if current trends continue.”
Despite £50bn being pumped into global money markets by the major banks last week, households suddenly have to cope with the dangers of a much riskier financial environment.
“Lenders and consumers must accept the game has changed in recent months,” said Ray Boulger, of independent mortgage broker John Charcol.
“For years, consumers have been king as lenders competed for their business. Now a vast amount of capacity has been taken out of the mortgage market, allowing lenders to be far pickier.
“Borrowers should keep their credit histories clean by paying their mortgages and any other loan interest on time, and at least the minimum monthly balance on their credit cards, because lenders are already looking to exclude problematic borrowers.”
Simon Burgess, of British Insurance, which sells payment protection insurance to guard borrowers against redundancy and illness, said: “People have been using their capital asset to generate income and sustain their lifestyles, and this has to be paid for eventually.
“Many people are genuinely fearful they won’t have a job a year from now, and the outlook is bleak.”
With Britain’s consumers holding household debts of £1.3 trillion, the experts suggest these survival tips to help stay afloat:
Drawing up a budget
Miss Harris, of Moneyfacts, said those struggling to make ends meet should “go back to basics and make a budget”.
She added: “Write down your income and expenditure, review any luxury bills and consider ways to cut back on day to day expenditure.
“Speak to your lender as soon as you can. Burying your head in the sand is the worst action you can take.”
Mortgages
The squeeze could be toughest on borrowers who fixed their rates at about 4.5 per cent in August last year, said Richard Brown at Moneynet.co.uk.
Seeking new loans next year, they could find many fixed, discounted and tracker products carrying hefty upfront fees and possibly tie-ins for a set period of time.
Mr Brown said borrowers with repayment mortgages might extend their mortgage terms to 35 or 40 years.
Increasing the term from 20 to 40 years on a £100,000 loan at 5 per cent cuts monthly repayments form £668 to £485.
Mr Boulger, at Charcol, thinks tracker mortgages, moving in line with the Bank of England base rate, are probably best in current circumstances because “many lenders won’t pass on the full benefit as rates come down unless trackers force them to do so”.
Maximise income on savings
This can be done by locking money away in a fixed-rate bonds paying nearly 7 per cent gross in some cases.
“Fixed-rate bonds for a fixed term could look increasingly attractive as rates fall over the next 18 months,” said Mr Boulger. “I see 2008 as the ‘year of the saver’, because cash will seem attractive against an uncertain stock market. Savers will have the upper hand for at least the first half of the year, as lenders compete to raise money. It was interesting to see banks putting savings rates up in response to the latest cut in Bank base rate.”
Buy insurance cover to protect income against redundancy and illness
Sort this cover out well before either of these troubles strike, and at a realistic price.
Many consumers with hefty debts on credit cards and personal loans have unwittingly sent debts even higher by buying payment protection insurance at prices heavily inflated by lenders. More than 18 million payment protection insurance policies are believes to be in force, with some generating returns as high as 70 per cent for providers. You can get similar cover, for much less, from cut-price payment protection insurance providers such as British Insurance.
Get off the plastic treadmill
Mike Naylor, of price comparison service Uswitch.com estimates 13.4 million store card accounts carry outstanding balances totalling £2.7bn, with an average interest rate of 26.3 per cent. The average credit card interest rate is 16.25 per cent.
He added that consumers holding store cards should switch to credit cards with a combination of 0 per cent on balance transfers and new purchases.
For examples, Abbey’s card with interest-free balance transfers for 13 months offers a 5 per cent supermarket cash back deal running until 31st July for new applicants, with existing customers getting cash back until 31st March.
