Tough times lie ahead. For 15 years we have basked in low inflation, low
interest rates and low unemployment, while the value of our homes has risen
steadily. Yet Britons have drifted deep into debt: every five minutes UK
personal borrowing grows by £1 million. In particular, many of us have
borrowed heavily to climb up the property ladder.
Conditions are now far less sunny: Mervyn King, the Governor of the Bank of
England, has said that rising food and fuel costs are likely to drive
inflation higher. What he called “unwise” lending will mean that banks may
fail to pass on to borrowers interest-rate cuts and in a slowing economy
there will be fewer jobs. Here is our 20-point guide to staying in control
of your loans in the new climate of higher-cost, harder-to-secure credit:
WATCH FOR WARNING SIGNS
Things are most worrying for the 1.4 million households that are due to come
off low-price fixed-rate loans this year. But you should also be concerned
if you are on a downward spiral of paying back less and less of your
borrowings each month. Failing to repay your overdraft (and going up to, or
exceeding, the limit regularly) is a sign of credit distress - as is taking
on new borrowings, such as another credit card, without clearing the old.
CAST AROUND FOR MORE CASH...
If you have suffered redundancy or are employed on short-term contracts, you
may have paid too much tax under PAYE and may be due a refund. Check with
Revenue & Customs.
Go online to www.direct.gov.uk and
check if you are getting all the benefits due to you.
Check on your tax credits at www.taxcredits.inlandrevenue.gov.uk.
... AND CUT BACK YOUR SPENDING
Budget sheets and a calculator can be found at www.moneybasics.co.uk.
Could you pay less for expensive items such as utilities? Check at a
price-comparison site such as www.uswitch.com
.
Ditch insurance policies you don't need, such as payment protection insurance
(PPI) or mobile phone cover. Cancelling PPI on a £5,000 loan over three
years will save £366.60 a year.
The websites www.creditaction.org.uk
and www.moneysavingexpert.co.uk
have hundreds of money-saving ideas.
APPROACH YOUR LENDER...
Ask your lender for advice. If your problem is short-term - perhaps you were
off work because of an illness - it may offer a payment holiday during which
it will accept lower or even no payments. It may even suggest an alternative
mortgage.
If you are repaying both capital and interest, switch to an interest-only
loan. On a £200,000 loan, a borrower paying 6 per cent can save £289 a month
this way. But be sure to begin repaying the capital again as soon as you
can.
Increase the term of your loan to reduce the monthly repayments due. An
increase from 25 to 30 years on a £100,000 mortgage cuts £44 a month off the
bill - but be warned: you will pay much more over the term of a longer loan.
You may be able to take out a cheaper mortgage with another lender, although
companies have tightened their lending criteria since the credit crunch.
Pay mortgage, council tax and utility bills before credit and store card
bills. Non-payment of the former can bring much harsher penalties.
Ask your lender for more time. Show it how many of the above steps you have
taken. Remind it that repossession is a financial hit for both of you.
If repossession looks inevitable, aim to sell the property yourself. Point out
to the lender that this serves both your interests: a far better price will
be achieved if househunters see a cheerful, furnished home rather than an
empty property on sale through an auction house.
Stay on the property ladder. You should be aiming to downsize to a cheaper
home.
... AND CONFESS TO THE PROBLEMS
This is perhaps the most important thing of all, and involves being frank
with:
Yourself. People in debt are often in denial. Do not underestimate how much
you owe, or fool yourself that “a cheque is in the post”.
Your partner and older children. You may be ashamed, angry, frightened and
depressed, but you need to talk to them, not least because they can try to
boost their income and cut their spending. I was once phoned by a lady who
had people at the door to repossess the family home, yet her husband had
told her nothing.
Your mortgage company. Your lender cannot be sympathetic if you have not told
it. Always communicate in writing and keep copies of letters sent and
received; only make offers you can afford and back this up by showing the
company your budget. Tell it about every change in your circumstances. Ask
the company's advice.
Other debtors. Once you have informed your major creditor - the mortgage
company - write to everyone else to whom you owe money.
Debt advice agencies. If you have several debts, it is vital to seek free and
confidential help from a debt advice charity. Visit the Consumer Credit
Counselling Service at www.cccs.co.uk
(its free helpline is 0800 1381111) or National Debtline at www.nationaldebtline.co.uk
.
The writer is president of the money education charity Credit Action
A good option is to rent out your own property - and move to a smaller property. This will protect your major asset, rather than having to sell it or having the mortgage company re-possess it at this time of depressed prices.
In time your property - like all houses - will inevitably rise in value. Once the crisis period has passed - it may take a couple of years or so - you may even want to move back to your own much-loved house again.
J Newhouse, London W3, London
I think the writer is not thinking this issue through fully !
Switching to an interest only mortgage without a suitable repayment vehicle is not very good advise!
Telling people to cancel existing PPI insurance may be the next big scandal too.
What would the writer say to someone who cancels a perfectly good PPI protection contract today on their advise, who then gets made reduncant in 6 months time, and has to survive on £59 Job Seekers Allowance per week, ? or does the writer have some insider knowledge of who has a guaranteed job these days ? Just hope your own PII cover is up to date !
PDont lump PPI and Mobile phone insurance together, they are just not in the same league.
There is no effective substitutable policy for PPI, as the FSA have continually said. Mobile phones are covered under good household policies,
if people would just read what their policies do & consider what they need rather than how cheaper a premium they can get we would all be better off
Steve Clowes, Stoke on Trent , Staffs
May ABI and Steve Devine omit to say that PPI is useless to a self-employed person, eg the director of a small business. I speak from experience. To avail yourself of the PPI cover, you would have to (a) resign as director, (b) cease trading (ie let down what customers you did have), and (c) sign on the dole. However, because of (a) and (b), you would be perceived as having made yourself deliberately unemployed and would not qualify for unemployment benefit for the first six months.
A lot of self-employed people have been mis-sold PPI.
Rachel Mawhood, London, UK
To those who express concern about ditching PPI ... have you ever tried to make a claim on a PPI policy? It's a bit like getting bood from a stone! Talk to people who've been in that industry - they will tell you the loopholes (in favour of the insurance company, of course) are big enough to drive a truck through. PPI won't be your salvation if you lose your job & have loans to repay - you will be lucky to have a successful claim now matter how dire your circumstances. Ditch the PPI, and get some good money education instead.
panda-kfn, Reading,
Tough times do lie ahead and there's no doubt that the credit crunch is going to hit a lot of us in the pocket. So advising people to ditch Payment Protection Insurance at the exact point in time when many are likely to need it seems misguided and irresponsible - not unlike ditching your parachute before jumping out of a plane.
The fact is, if money is already tight, PPI can provide a safety net that otherwise would not be there if you fall ill or lose your job. I would have thought better advice would be to ask how you'd cope financially if your income stopped or was reduced, for whatever reason. Then decide if PPI is something you need. Ultimately, everyone needs to understand their own financial situation, as opposed to following rather generic advice.
Cathy Thomas, Richmond, UK
With the economy looking increasingly uncertain and record debt levels continuing, the need for people to protect their loan repayments has never been greater. Repossessions are on the increase, with 27,100 repossessions in 2007, compared to less than 10,000 in 2003 and 2004. So it is poor advice to "ditch insurances you don't need, like Payment Protection Insurance (PPI)". PPI provides valuable protection against a sudden loss of income if you become seriously ill or lose your job. Research shows that few people have a realistic strategy for how they would manage in such a situation. For most, personal savings are unlikely to be enough. Everyone with a mortgage or other loan commitments should carefully consider how insurance can provide financial protection if the worst happens.
May, ABI, London,
Also, from other case studies I have read (there was an excellent one on the BBC website a while ago), telling your mortgage provider you are having a problem could be the fastest way to increase your difficulties!
Pete, Hong Kong, China
Some good advice.... but I personally would be in a state of permanent terror if I had a mortgage of £200,000 in this climate.
For the reasons you listed in second paragraph, I'd be forgetting about any switching to "interest only" selling (6 months ago) and renting instead.
David S, Manchester, UK
I think its completely irresponsible for the writer to suggest borrowers should ditch insurance, such as PPI and MPPI at the very time it could actually save them from the misery of spiralling debt and possible repossession.
There are not too many options available to borrowowers beyond savings and insurance.
Having to rely on the courts or state benefits is not a very good position to be in and should be avoided.
Steve Devine, Bedford, UK