Archive for August, 2007

The price of overdraft ignorance

Thursday, August 30th, 2007

The vast majority of current account holders haven’t a clue how much it costs to go into the red.

And millions think – wrongly – that an overdraft is likely to be cheaper than a personal loan.

Even those who have successfully reclaimed bank charges often can’t confirm how much they were made to pay, says MoneyExpert.com.

In fact, consumer organisation Which? has calculated that the UK’s banks made £4.7 billion from unauthorised overdraft fees and penalty interest last year.

The average interest rate for unauthorised borrowing is around 25 per cent.

And there is typically a charge of £20 to £39 each time you go over your limit without permission or a direct debit or cheque bounces.

Yet more than 40 per cent of those questioned by MoneyExpert admitted they had no idea about the fees their bank charged for unauthorised borrowing.

Many others reckoned it would cost less than £20 a time.

More than two-thirds of those who claimed to know their bank’s authorised overdraft rates underestimated these too, saying they were paying between 5 and 10 per cent.

The actual authorised borrowing average is 12.35 per cent – while personal loan rates start at 6.3 per cent.

MoneyExpert chief Sean Gardner says: “While it’s ultimately the customer’s responsibility to avoid going beyond their overdraft limit, banks should make their charging structures more transparent.

“They could also provide a clearer indication of when customers are close to going in the red.”

These are lovely ideas, but with so much money being made from customer ignorance, why on earth would the banks want to change their ways?

How homeowners can offset rate rises

Thursday, August 30th, 2007

Homeowners are becoming increasingly nervous about the Bank of England’s monthly interest rate decisions.

There have been five rate rises in the past 12 months, and the latest rate-setting meeting takes place next week.

For many people, another hike could be the last straw.

As a result, four out of ten borrowers now get anxious in the run up to the Bank’s meetings, says Intelligent Finance.

The traditional way to protect yourself from this kind of worry is to take a fixed-rate loan.

But, as the internet bank and mortgage lender points out, another solution is to transfer to an offset mortgage.

As the name suggests, these offset your savings against your debt – saving thousands of pounds of interest over the mortgage term, and allowing you to clear your debt years early.

IF’s managing director Mark Parker says: “With interest rates on the rise and purse-strings tightening, it’s important to make every penny work as hard as possible.

“Offset mortgages give peace of mind, negating the effects of a rate hike and giving the flexibility to lower monthly payments.”

Offsets don’t work for everyone though, and if you don’t have a large savings pot, they can actually leave you worse off than a traditional mortgage deal.

So make sure you do your sums before signing up for one of these loans.

Pay attention when you shuffle credit cards

Tuesday, August 28th, 2007

Abbey has launched a credit card offering a very attractive 5 per cent cashback on £1,000 of supermarket shopping.

That’s a potential windfall of £50.

But before you rush off to fill out your application, there’s something else you need to know.

After an initial three months interest-free for purchases, those who don’t clear their spending every month will be charged a less than attractive rate of 15.9 per cent.

As a result, heavy users could soon find interest charges more than outweigh the cashback benefits.

Barclaycard, IF and Halifax all have cards which charge less than 10 per cent interest, and for someone who keeps a running balance, they could be better value.

But the interest rate isn’t the only cost you need to keep an eye on when choosing plastic.

Last year the Office of Fair Trading ruled credit card companies must keep penalty fees to a maximum of £12.

And while this might seem like a step in the right direction, consumer organisation Which? says they have simply found other ways to recoup the lost income.

So when you’re choosing a new card, it’s essential to check all the small print.

Which? advises paying close attention to…

• Annual fees and low usage charges
• Balance transfer fees
• Minimum payments designed to maximise your interest bill
• Payments allocated to the cheapest debt first
• The way interest is calculated
• Credit card cheque interest rates and fees
• Cash withdrawal rates and fees

The low-down on mortgage rates

Sunday, August 26th, 2007

And now some more (tentative) good news for house hunters and mortgage seekers…

In its August house price index, online estate agent Rightmove reports that London property asking prices have fallen for the first time in a year.

It reckons this trend could spread, bringing down house price increases to about the same rate as wage inflation – in other words, around 3 to 4 per cent.

This may seem depressing if you have a home to sell.

But if you’re a first-time buyer, trying to get that tricky initial foothold on the property ladder, it could be cause for celebration.

In fact, it could be something for all borrowers to shout about.

As Rightmove points out: “This… leads to the conclusion that the pressure on the Bank of England to raise interest rates again is reducing significantly.”

Fingers crossed…

Bad news for poor credit histories

Saturday, August 25th, 2007

The other day, in Britons struggling with debt repayments, I said there might be a chink of light amid all the financial gloom.

But I spoke too soon as far as anyone with a troubled credit history is concerned.

The recent global stock market falls were sparked by US lenders getting in a mess over what are known as “sub-prime” or impaired credit loans.

Basically, they lent too much money to too many people who, it turned out, weren’t able to pay it back.

Now, here in the UK, lenders are getting the jitters about these mortgages.

Northern Rock has priced itself out of this sector of the market by raising interest rates by up to 1.25 per cent and ditching base rate tracker loans for borrowers with poor credit records.

Specialist impaired credit mortgage lender GMAC-RFC has also lifted its rates, and it looks as if other sub-prime lenders will follow their example.

This doesn’t mean you won’t be able to get a mortgage if you have a chequered financial history, but it does mean it’s going to be harder to find a good deal.

Because of this, it’s more important than ever to shop around – and to borrow responsibly.

If you’ve had credit problems in the past, it’s crucial not to over-extend yourself.

Stick with a debt you can comfortably afford…

Be financially disciplined so you can keep up the repayments…

And hopefully, before long, your troubles will be a thing of the past.

Why it’s better to pay mortgage fees up front

Thursday, August 23rd, 2007

Following on from last week’s post about the 51 different charges that mortgage lenders can slap on unsuspecting borrowers…

I’ve had an email from an eagle-eyed mortgage seeker pointing out that the fees themselves are only part of the problem – the way lenders charge them is frequently designed to fleece us still further.

He writes: “If there are arrangement fees to pay at the beginning of the mortgage, often lenders offer to (or automatically) add these onto the amount borrowed.

“The fees can often be in excess of £1,000 and when borrowed at 5.75 per cent, for instance, over 25 years this can add quite an amount to the cost.”

He’s absolutely right.

If you’re trying to keep expenses down, it can be very tempting to let your lender add its loan arrangement or set-up fee to what you owe.

But once you realise how much this will cost over the long term, you might not be so happy.

Taking his example, a £1,000 fee paid off over 25 years at 5.75 per cent annual interest would actually cost £1,887 – almost double the original amount.

My correspondent asks: “Would it be better to save up or borrow with a short-term loan to cover the fees and some expenses, to save in the long run?”

It certainly would be better to cover these costs up front from savings or, if you can’t manage that, to pay with a low-cost, short-term personal loan.

Mortgage lenders make enough money out of us already – there’s no need to hand them more.

Britons stuggling with debt repayments

Thursday, August 23rd, 2007

A record number of households are having serious difficulty keeping up with debt repayments, according to the Daily Telegraph.

And no wonder – between us, the paper says, we owe more money than the UK’s entire economy generates in a year.

Add together outstanding mortgages, loan, credit card and higher purchase balances plus other forms of debt and it comes to a whopping £1,345 billion.

Meanwhile, our annual economic output stands at just £1,330 billion.

Apparently, we owe more per head in relation to our income than the Americans, Japanese or Germans.

So it’s no surprise to learn that around 2.5 million people describe themselves as “very concerned” about their ability to manage their debts.

Frankly, I’m amazed that figure isn’t a lot higher.

But there may be a chink of light amid all this gloom.

Mortgage company mform.co.uk says the rates at which mortgage lenders borrow in the money markets to support their fixed-rate deals fell last week, and it thinks this could be the beginning of a new downward trend.

The Nationwide and West Bromwich building societies have now reduced their rates on some fixed-interest deals.

Fingers crossed the desire not to be left looking uncompetitive will encourage other lenders to follow their example.

Don’t get caught in the phisherman’s net

Monday, August 20th, 2007

There seems to be a new spate of phishing emails landing in email inboxes, so be on the lookout.

A site user reports that over the past few days he has received quite convincing emails supposedly from Halifax, Lloyds TSB and NatWest, all asking him to confirm his account details.

Luckily, he knew that no bank would ever ask for this information by email.

This, and the fact that he isn’t actually a Halifax or Lloyds TSB customer, left him in no doubt that they were fakes.

I’ve had several phishing emails myself, purporting to be from a range of banks, and they were all after the same thing: my bank account details so they could clean me out.

If you get one of these messages, whatever you do, never follow the instructions it contains.

If you can, forward a copy to the bank it claims to be from – as this may help in efforts to track down the fraudsters responsible – then delete the original.

The great penalty fee rip-off

Friday, August 17th, 2007

Financial institutions are finding ever more ways to part us from our cash.

Price comparison site Moneysupermarket.com warns: “Brits face running a gauntlet of 112 charges across just five financial products – mortgage, current account, savings product, loan and credit card.”

The site’s managing director Stuart Glendinning adds: “It is unbelievable that five financial products can be the root of so much penalty pain.

“With so many default fees and charges in place, even the most astute consumer can fall foul.”

Mortgages are the worst offenders with a possible 51 different penalty charges, while current accounts have up to 27, credit cards have 19, loans 11 and savings accounts four.

That’s why it’s essential – particularly with mortgages where there are so many ways to get caught out – that you read every word of the small print before you sign on the dotted line.

Ambition that could put your home at risk

Friday, August 17th, 2007

Apparently sending a child to a fee-paying secondary school could cost as much as £140,000 – not the kind of money most people have lying around.

That’s why mortgage firm Charcol.co.uk is suggesting parents who long to see their little darlings enjoy a private education, but don’t have the income to finance it, should consider remortgaging to free up the cash.

Charcol says this is a better option than using credit cards, which is certainly true – although I can’t imagine many people would qualify for a card with a credit limit high enough to allow this kind of spending.

It maintains remortgaging is also better than other kinds of loans, but I’m not so sure about this.

The interest rate might be lower, but you will be repaying the money over a far longer period, making it more expensive in the long run.

Charcol’s Katie Tucker says: “For many parents it is likely that in the last few years the value of their house will have risen, and the value of their mortgage will have gone down. This, therefore, presents an opportunity to increase their mortgage as a means of releasing the cash.”

She makes it sound so easy, but remortgaging to release cash can be a risky business.

The more you borrow against your home, the more you have to pay back – and the greater the likelihood you’ll end up in difficulties if your finances take a downturn.

If the worst comes to the worst, you could lose your home.

Is that a price worth paying for a few years of private education? I don’t think so.