Archive for September, 2007

The price of long-term mortgage security

Thursday, September 13th, 2007

The stock market turmoil is forcing up the interest rates at which banks borrow to fund mortgages.

And that means the rates they charge customers are on the increase too.

Earlier this week, Abbey announced its mortgages were about to get more expensive, and other lenders – including Halifax - look set to follow.

So it’s no surprise to see Woolwich, the mortgage arm of Barclays Bank, promoting a new ten-year fixed-rate deal.

It’s hoping nervous borrowers will flock to fix their rate at 5.59 per cent for the next decade.

Andy Gray, Woolwich’s head of mortgages, says: “With many borrowers coming off cheap fixed-rate deals this autumn, and many people in the market worried about volatility in interest rates, this product offers long-term security.”

But this type of security comes at a cost.

Although, in the current market, 5.59 per cent may appear attractive – especially when the Bank of England’s own base lending rate stands at 5.75 per cent – that could well change in a year or two.

Most experts agree that before too long interest rates will fall, and someone tied in for ten years to a rate that’s no longer competitive will be badly out of pocket.

Sign up for a product like this and there’s no way out though – unless you want to pay a six per cent early repayment penalty.

For someone borrowing £150,000, that would be £9,000 down the drain…

And for most people, that’s far too much to pay – even for long-term security.

Three cheers for the Chancellor

Thursday, September 13th, 2007

…That’s not something I’m likely to say very often.

But Chancellor Alistair Darling deserves praise for his attack on the banks’ over-eager attitude to lending.

Between us, we Brits owe more than £1.3 trillion and record numbers are struggling to keep up with mortgage and other debt repayments.

In today’s Daily Telegraph, Mr Darling says the big banks need to get back to ‘good old-fashioned banking’.

And that means being far more cautious about who they lend to.

He makes it clear borrowers share some responsibility for their troubles, saying: “They need to ask themselves, ‘Can I repay this?’”

He adds: “Institutions have in some cases been prepared to lend to people without checking if they were ever going to repay it.

“It doesn’t do any good for anybody, particularly the person in debt but also the lender, to be getting into a situation where you have bad debts.”

Well said – if banks didn’t lend irresponsibly people wouldn’t be able to get into such a mess.

Lloyds TSB leads charge to cut overdraft costs

Wednesday, September 12th, 2007

There’s been an interesting development in the battle over bank penalty charges.

At the end of July, the Financial Services Authority gave the banks permission to put all refund claims on hold pending the result of a High Court test case.

This won’t be known until next year, but if it goes as campaigners expect, the Office of Fair Trading will order a clampdown on these charges – just as it did with credit card charges (see The costly truth about credit card transfers, below).

Now, out of the blue, Lloyds TSB has announced it’s cutting its unauthorised overdraft charges.

It claims it’s merely responding to requests from customers.

More likely it’s bowing to the inevitable and wants to make some good publicity out of it.

What’s the betting that when its fellow lenders follow suit, Lloyds will be heard reminding anyone who’ll listen that it made the first move and they are only copying its generous action?

The costly truth about credit card transfers

Tuesday, September 11th, 2007

Credit card balance transfer fees are on the increase.

The average charge has risen by 0.5 per cent to 2.67 per cent in the past year, according to MoneyExpert.com.

Last September, the typical fee was 2.1 per cent, but the desire to recoup profits lost following the Office of Fair Trading’s order to cap penalty fees at £12 has prompted a slew of rises.

And around 90 cards now charge a flat transfer fee of 3 per cent.

That means someone shifting a £5,000 debt could pay £150 for the privilege.

You don’t have to fork out to move your debt to a cheaper card though.

True, you won’t find any lenders who don’t charge a fee offering 12 months interest-free on a transferred balance.

But you will find five and six-month deals – providers include Norwich and Peterborough Building Society, Northern Bank and Ulster Bank.

If you don’t think you can clear your balance that quickly, several others – including Sainsbury’s Bank, Northern Rock, Yorkshire Building Society and Mothercare – charge less than 6 per cent for the life of the transferred balance.

If you really put your mind to clearing your debt, you could find that works out cheaper than paying a transfer fee.

Safe routes to first-time home ownership

Tuesday, September 11th, 2007

Mortgage rate and house price rises are keeping first-time buyers out of the market.

New figures from the Council of Mortgage Lenders show the value of lending to first-timers in July was down 4 per cent on a month before, at £4.4 billion.

And, at 32,400, the number of first-time buyer loans was an even more worrying 12 per cent lower than a year ago.

That’s not to say there aren’t ways for cash-strapped first-timers to get a toehold in the market.

Of course, some are riskier than others.

According to the CML, the average first-timer is borrowing 3.39 times their income.

Many lenders will now go as far as four-times income, and some will lend five or six.

But borrowing at that level makes buyers hostages to fortune.

Job loss, ill health, further rate rises or falling property prices could quickly transform what looked like a minor financial gamble into a catastrophe.

A significant proportion of first-timers are going for interest-only loans in the belief that this will keep their costs at an affordable level.

But this is an equally dangerous and, ultimately, costly course of action.

There are less risky ways to make buying affordable, though.

A loan or mortgage guarantee from parents, pooling resources with a friend or taking advantage of one of the Government’s low-cost HomeBuy schemes can all help turn the dream of property ownership into reality.

It pays to compare car finance costs

Thursday, September 6th, 2007

If you’re one of the eight million Britons planning to buy a car in the next six months, don’t just sign up for your dealer or bank’s finance package.

It could add thousands of pounds to your costs.

Samantha Owens, head of personal finance at money search engine Moneyfacts.co.uk, warns: “Get your finance choice wrong and it can prove a costly mistake.”

Some dealers offer interest-free credit and, provided you read every word of the agreement so you know what you’re getting into, it can be a boon.

But, according to personal finance switching site uSwitch.com, the average annual interest rate on dealer finance is 10.76 per cent – and many charge considerably more.

That’s why a low-cost personal loan can be much better value.

These are available from 6.3 per cent – but they too can be far more expensive.

Samantha says: “On a £5,000 loan, the difference between choosing the best and worst loan deal could cost you an extra £861, while the wrong choice on a £10,000 loan could see you out of pocket by more than £2,600 – or, to put it another way, increase the cost of financing your car by a massive 26 per cent.”

That’s why it’s vital to compare rates before committing yourself.

Get your mortgage on the right track

Thursday, September 6th, 2007

September is one of the busiest months of the year for remortgaging.

Almost 90,000 homeowners will go in search of a better deal on nearly £46 billion worth of home loans, says lender Abbey.

On average, they’ll spend just under seven hours shopping around.

Nici Audhlam-Gardiner, Abbey’s head of mortgages, says: “Re-mortgaging might be a time-consuming process, but it’s worth investing the time and effort so that you don’t have to invest too much of your hard-earned cash when your current mortgage deal comes to an end.

“In particular, customers coming to the end of fixed-rate deals in the next month will find it hard to match their previous mortgage deal as rates have gone up – meaning good deals become even more important.”

That’s why, no matter how boring you might think mortgage shopping is, it’s time well spent.

The difference between a good deal and a bad one can be thousands of pounds of interest – and a lot of grief – over the years.

For many people, a major step in the remortgaging process will be deciding whether to go for another fixed-rate deal or to opt instead for a discounted variable rate or a base rate tracker.

Several experts are saying fixed rates look expensive – and that today’s decision by the Bank of England’s monetary policy committee to leave rates on hold makes it more likely the next move will be downwards.

If they’re right, a tracker could be a very wise choice indeed.

Knowledge will help you through mortgage maze

Tuesday, September 4th, 2007

Mortgage lenders say they want our business, but many of them make their loans so complicated it can be well nigh impossible to choose between them.

The range of interest rates, fees, terms and conditions they offer can seem utterly mystifying.

Abbey currently has 89 different mortgages, Scottish Widows 97, C&G 101 and Standard Life an incredible 219, according to financial information provider Moneyfacts.co.uk.

Julia Harris, the site’s mortgage expert, says: “The number of mortgage products offered by some lenders is more than enough to baffle the average man on the street.”

To work out the true cost of each deal, as well as the rates and fees, you have to factor in the associated valuation and legal costs.

And if you need to borrow 90 per cent or more of your property’s valuation, you are also likely to face a higher lending charge.

The answer, of course, is to do your homework.

The more research you do, the less daunting the mortgage choice will become.

Spend a few hours on the internet reading…

Then enlist the help of an independent mortgage adviser…

And you’ll be well on your way to finding the right deal for your needs.

You need to think about your pension – NOW!

Monday, September 3rd, 2007

More than a quarter of British adults have made no provision for their retirement.

The number of men and women aged 30 to 49 who say they have “no form of pension” has increased to 26 per cent from 20 per cent a year ago, says financial services provider Alliance Trust.

Things get even bleaker when you separate out the sexes, with nearly a third (31 per cent) of women admitting they haven’t any pension provision, compared to 23 per cent in 2006.

The figures for men are only slightly better at 22 per cent and 17 per cent respectively.

I’m staggered.

Who on earth do they think is going to provide for them in old age if they don’t do it themselves?

Certainly not the state. Have you checked out state pension rates recently?

Consumers’ organisation Which? says the average person reckons they will need an income of £312 a week to enjoy a comfortable retirement.

But the basic weekly state pension for a single person is just £87.30 – and, contrary to popular belief, this isn’t an automatic right.

To qualify, men need to have paid 44 full years of National Insurance contributions and women 39.

Assuming you have, pension credit will top this up to £119.05, which means that if you don’t do something about it, you could be almost £193 a week – or more than £10,000 a year – short.

That’s an awful lot of money to do without, and it’s likely to put all but the most basic necessities out of reach.

The solution? It’s simple – start saving right now!

Whatever the problem, equity release isn’t the answer

Monday, September 3rd, 2007

The most popular reasons for signing up to equity release plans are funding home improvements and treats such as exotic holidays.

The next most frequent motives are the need to pay for a divorce or buy out an ex-partner, according to new research from financial services firm Saga.

Equity release, which allows the over 60s to access the cash tied up in their homes, is becoming increasingly popular.

But whatever the reason for taking out a plan, it is not something that should be done lightly.

This type of loan should always be considered as a last resort, when all other options have been ruled out.

Yes, it allows you to get hold of cash at a time when you need it…

And it may seem very appealing because there are no repayments to be made until you sell up or die.

But that doesn’t mean equity release is good value.

In fact, the costs are far higher than most people realise.

Depending on the plan you choose, you’ll be charged interest, which rolls up – incurring interest on the interest – until it is repaid.

The other possibility is that you – or your heirs – will be expected to hand over a sizeable percentage of your home’s eventual sale price.

Either way, you, or they, can expect to repay several times more than you originally borrowed.

So before you opt for equity release, think hard about what you want the money for – and whether it really is worth it.