The economy seems to be improving slightly, but we know there’s plenty of you still really struggling..
What we all really want to know is: how will the economy affect me? A lot will depend on your personal circumstances: the security of your job, your levels of debt or savings, whether you own a property… But whatever your situation, MoneyMagpie can show you how to navigate the choppy financial waters that lie ahead.
Your immediate priorities should be to examine your mortgage, credit card and savings arrangements. For most people, these are the three most important aspects of their finances. What many don’t realise is that reviewing them is an easy way to make significant savings for relatively little effort.
With interest rates so low at the moment, savers are losing out – but borrowers are reaping the rewards. So if you’ve got a fair amount of savings tucked away in this type of financial climate, it’s worth considering taking out an offset mortgage.
Why is an offset good for those with savings?
In basic terms, offset mortgages are where the balance of the mortgage is reduced by the amount of money in your savings or current account. For example, if your mortgage is £150,000 and you have savings of £10,000, your mortgage balance will be measured as being £140,000 (and you will only pay interest on that amount).
What’s more, as the interest on your savings is being offset, you are to all intents and purposes not paying tax on your savings interest. You can find all the best offset mortgage deals here.
What kind of offset?
A big question at the moment is whether you should go for a fixed-rate or variable mortgage (both are available as offset mortgages). It’s a trade-off: with fixed-rate mortgages, you get the security of knowing your interest rate won’t change over a fixed period. Variable ‘tracker’ deals, meanwhile, usually offer the best rates in times like these – but you need to be prepared for rates to go up as well as down.
With interest rates remaining at an all-time low people with tracker mortgages have extremely low mortgage payments at the moment. Fixed-rate mortgages are still popular though, as many look to protect themselves from the uncertain market.
However, the bank base rate is unlikely to rise in the immediate future, with industry experts predicting that mortgage rates will stay low for at least a year. But large government borrowing (as is happening during the current recession) has historically tended to lead to higher interest rates in the long term.
If you have a tracker mortgage, you are more likely to be in a position to currently overpay on your mortgage (assuming your mortgage contract doesn’t penalise you for doing this). With rates so low at the moment, you can keep your previous level of mortgage expenditure while paying more of it off.
This is a good idea to do if you can. You will pay off your mortgage quicker and you will pay less in interest. Also, by building up equity in your property, you won’t need to borrow as much when the time comes to remortgage – which will enable you to get a more competitive mortgage deal.
Fixed-rate mortgages may be set above the current base rate, but there are still some fairly low rates around. Locking yourself into a fixed-rate mortgage gives you security and peace of mind (as you know what rate you’re going to be paying for years to come, and you won’t end up paying more when the base rate rises). This certainly makes it easier to budget and manage your finances. You can find the best fixed mortgage deals here.
REMEMBER! If you’re locked into a long-term mortgage deal of more than two or three years, you could face early repayment charges should your circumstances change. These can be high, potentially wiping out any interest you would have saved over the years.
If you think you might have to move in the next few years (due to career change, job loss or simply because you need to upsize or downsize your property) then going for a long-term fixed mortgage (anything over three years) is not going to be the best option.
Shorter term fixed-rate mortgages give you much more flexibility. The downside is, you might struggle to get as good a deal when you remortgage, as your loan to value ratio (LTV) will be higher and rates may have increased. Plus, remortgaging costs can easily run to over £1,000 (see our tips on how to bring down your mortgage set up costs).
What if you’re remortgaging to pay off debt?
Should you have significant debts however, you could consider remortgaging to pay them off while rates are still low. Talk to independent brokers London and Country, who will search all deals on the market for you to bring you the best deal. This service is absolutely free – you won’t pay a penny unless you decide to switch to a better mortgage through them.
If you’ve got credit card debt you can’t shake off (and can’t see the economic downturn making it any easier), then it’s worth considering getting a balance transfer credit card.
Balance transfer cards
Balance transfer cards allow you to put existing credit card debt onto them – but charge you 0% interest (usually for a period of between 5 to 16 months). This makes it much easier to clear your debts and can save you from being further out of pocket.
REMEMBER! These cards will start charging you interest after the 0% period, so it’s best to try and pay the debt off within that timeframe. Also, most cards tend to charge you an initial fee (usually between 2.5-3% of the amount you transfer) for switching the debt over.
Is it an option worth going for?
If you can pay off your debt within the 0% period then definitely. You need to watch out, however, for rates on new spending – they are often at the standard rate (the average is around 17% APR).
The longest 0% balance transfer deal is currently with the Barclaycard Platinum credit card which offers a whopping 29 months interest free. You’ll also get six months’ 0% interest on purchases which is a nice bonus.
Another great option is the Halifax balance transfer credit card, which offers 28 months interest free. The handling fee is just 2.45% and it offers 0% interest on purchases for the first six months.
The Nationwide card offers 0% for 26 months, with 0% on purchases for the first three months. The handling fee is just 2.4% with an APR of 17.9%.
REMEMBER! If you’re using these cards to help clear your debt, it makes sense to try and avoid putting purchases on them if you can – as that will only increase your debt.
However, if you’re confident of your finances (regardless of the recession) a 0% purchase card could come in very useful.
0% purchase cards
If you’re quite disciplined when it comes to spending, using a 0% interest purchase card can be a good way of spreading the cost of buying something big.
It’s far better to use one of these cards than to go for a 0% finance deal in a shop, for example. With your own 0% credit card you have a lot more control over the way you pay back the money and financing in shops is much more rigid and incurs more penalties in the case of non-payment.
Tesco’s Clubcard credit card offers 0% interest on purchases for 18 months, and 0% on balance transfers for nine months (with a 2.9% handling fee and a 16.9% APR).
Alternatively, the Halifax All in One Card gives you 15 months’ 0% interest on purchases and balance transfers (0.8% handling fee applies). The typical rate of interest is 17.9% APR.
You can even use these cards to actually make money. If you have the cash to cover the whole purchase, you could still buy the item (or items) with your 0% purchase card, then put the money into a high interest savings account and earn some interest on it until the end of the 0% period.
Obviously, to make the most of these cards you should aim to pay the whole thing off before the 0% period finishes – so that you clear the whole debt before you need to pay any interest on it. If you don’t manage to do this, you should try and switch the remaining debt to a 0% balance transfer card instead.
Check your credit rating!
Not everyone is approved for 0% balance transfer or purchase cards.
If you’re not sure how good your credit rating is, it’s definitely worth checking it before you apply. This is because if you apply for credit and get rejected, you’ll get a further black mark on your credit record.
You can check your credit rating for free with a 30 day trial subscription to CreditExpert (just cancel your subscription at the end of the free period if you don’t want to be charged anything).
Should your credit rating not be too hot, it’s best to go for a card with a low regular balance. Check here for the lowest standard rates.
First things first – if you’ve got significant debts, you should concentrate on paying them off before putting money aside for saving (unless you’re in the fortunate position of not having to pay any interest on your debts).
What about going for fixed rate savings?
Interest rates look destined to stay low at least until the end of this year, but if you tie up your money for a longer term (say five years) and interest rates go up, you could be missing out on the chance to make your money work harder elsewhere.
Really, the longest you should be fixing for is two to three years.
If you can afford to put some money away for more than a few years, it’s worth considering putting cash into a stocks and shares ISA.
Both Exchange-Traded Funds (ETFs) and Tracker Funds can be ‘wrapped’ in an ISA scheme so you don’t have to pay tax on the gains. These funds do carry risks, as they are obviously dependent on stocks and shares for their performance. But, over a long period, you should make a much better return than with cash.
Should you have an existing cash ISA, you can transfer your money into a stocks and shares one.
For more information, see our article on investing in stocks and shares ISAs.
REMEMBER! Make sure you don’t close your existing ISA when transferring your cash, or you’ll lose your tax break – ask for a cash ISA transfer form instead.
On the other hand, you might want both a cash and a stocks and shares ISA. Why? Because although interest rates for ISAs have plummeted with the economic downturn, cash ISAs are still better than putting your money into a tax-paying savings account. They can also offer you easy access to your cash – important when you need money to cover costs like unexpected bills or costly car repairs that crop up in everyone’s life from time to time.
If you’re looking to transfer existing cash ISA funds into a better account, the current best option on the market is Santander’s Direct ISA, which offers 3.3% variable AER tax free for the first 12 months. As the rate drops to 0.5% after 12 months, this is a good option for a year’s investment. It requires a minimum deposit of £2,500 and the account can be operated online, in-branch or by phone.
(Bear in mind that if you keep a cash ISA open, this will affect your stocks and shares ISA allowance of £11,280. So if you invested £1,000 in a cash ISA, you will only be able to invest £10,280 in stocks and shares.)
Ultimately, where you choose to put your money depends upon your individual needs. But if you tailor these financial tools to your personal circumstances, you should find it far easier to ride out the current financial storm.