Rock fall
DAILY MIRROR - 26TH SEPTEMBER 2007
A financial storm is brewing. Clouds are gathering over the economy and the future’s looking turbulent.
Interest rates have risen steeply in 12 months and house prices are starting to fall in many areas.
There is turmoil on the stock market and Britain’s fifth-largest mortgage lender Northern Rock has collapsed.
That fiasco means the days of easy money have come to an end as banks, eager to limit their risks, tighten up on who they will lend to.
The “credit crunch” triggered by turmoil in the US has also forced up the cost of borrowing, with tracker mortgages and loans becoming more expensive, particularly for those with a history of bad debts.
Even high-street stores are warning of a black Christmas as shoppers’ budgets are pinched by home ownership costs.
So what should you do to steer clear of the financial maelstrom?
The easiest way to ride out rate worries is to take out a fixed-rate mortgage. This will protect you from future rate rises and give you the long-term comfort of knowing what your repayments will be.
According to brokers London & Country, building societies Britannia and Skipton both have two-year fixed rates at 5.49 per cent, with fees of £999 and £1,599 respectively.
National Counties BS has a five-year fix at 5.49 per cent with a £695 fee.
For first-time buyers this is not the right time to take on a big mortgage. The slightest drop in house prices could leave you in negative equity (that is, with a mortgage worth more than the value of your home).
Don’t be enticed by deals such as Abbey’s which offers 100 per cent of the property price, plus an extra £25,000 loan. massive borrowing like this is a big risk.
Instead, give yourself more security by saving. Rates are good, and the bigger your deposit the safer you will be in the long run.
If all first-time buyers decided not to buy then this would ease demand for homes – and that would force down prices.
Insurance
When things do go wrong there are four types of insurance policy that will cover your bills if you fall ill or lose your job. These are term assurance (or life insurance), critical illness cover, income protection insurance and payment protection insurance.
All of these have pros and cons, but what you have to ensure is that you are not paying for a product you will never be able to use.
As with all insurance, costs will vary depending on your lifestyle.
Life insurance is the simplest and best form of cover – paying out an agreed sum when you die.
A 35-year-old male wanting £100,000 of life cover over 25 years will pay £10.65 a month (non-smoker) or £19.15 (smoker).
A similar type of policy is family income benefit – this pays the policyholder’s family a regular amount each month or year when the holder dies.
Critical illness cover pays out a tax-free lump sum on diagnosis of a range of medical conditions.
All insurers cover seven core illnesses, including cancer, heart attack and multiple sclerosis.
You may need to prove your health before you take out a policy but frequently insurers do not check. Instead they ask for medical records when you make a claim.
There’s been a lot of controversy over critical illness policies as many insurers have stalled on paying out, or turned down claims because an existing medical condition had not been revealed. Research showed one in four fail to pay up.
Critical illness cover has many flaws, one of them being the small print, so check the details carefully and make sure you are completely honest about your health.
Premiums are roughly the same as those for life insurance.
Another sort of cover is income protection, giving you a salary if you lose your job, until retirement or over a set period.
Because of the high level of payouts it is one of the most expensive forms of cover.
However, compared to the cost of losing your income it is minimal. A 35-year-old man in good health will pay less than £20 a month over 25 years with provider Unum for an annual sum of £12,500. Insurer Prudential offers lower premiums for those who stay in better health. It has just launched a PruProtect life insurance, income protection and critical illness cover.
And its radical new approach works on a severity basis, so that the payout is proportionate to your illness. It also means that the cover will continue if you recover, rather than finishing once a claim is made, like other policies.
Payment protection insurance is designed to cover you if you are unable to work because of an accident, sickness or unemployment. The policy will cover the repayments on your store or credit card, mortgage or a personal loan.
It is usually sold when you sign up for a loan and covers your monthly repayments.
But with credit cards this simply means the minimum amount you have to pay. And it only covers payments for 12 months.
Don’t just sign up to the first policy offered – particularly for products such as payment protection insurance. You can usually get better and cheaper elsewhere. Try independent providers such as British Insurance. For instance, payment protection insurance on a Bank of Scotland loan can cost up to £40.62 per £100, compared with £3.25 from British Insurance.
It’s likely that if you are self-employed or a contract worker you will not be able to claim on any of these policies.
It is important to shop around and, if you are worried about the small print, consult a specialist broker.
Before you buy ask to see a key facts document. This will list all the exclusions that will prevent you from making a claim.
