It’s now 2020 and the recession that started in 2008 is over for the most part. But the impact of coronavirus has that dreaded R word back on people’s lips. How will this impact your savings and overall financial stability?
What we all really want to know is: how will the economy affect us? A lot will depend on your personal circumstances. Things like the security of your job, your levels of debt or savings, whether you own a property, etc. Whatever your situation may be, MoneyMagpie can show you how to navigate any choppy financial waters that may 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?
Offset mortgages are when your mortgage balance is reduced by the amount of money in your savings/current account. For example, let’s imagine your mortgage is £150,000 and you have savings of £10,000. In this case your mortgage balance will be measured as being £140,000. You will also only pay interest on that amount too.
What’s more, as the interest on your savings is being offset, you are 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. It’s a trade-off in all honesty. With fixed-rate mortgages, you get the security of knowing your interest rate won’t change over a fixed period of time. Variable ‘tracker’ deals, meanwhile, usually offer the better rates, but the can go up as well as down.
Fixed-rate mortgages are currently the most popular, as many look to protect themselves from the uncertain market.
If you have a tracker mortgage, you likely overpay on your mortgage. This is actually a good way to keep your mortgage expenditure low while you’re paying it off.
This is a good to do if you can. You will pay off your mortgage quicker and you will pay less in interest. Also, you won’t need to borrow as much when the time comes to remortgage. This 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. 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.
If you’re locked into a long-term mortgage, 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 have to move house, then a fixed mortgage 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. Your loan to value ratio (LTV) could 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, then it’s worth considering getting a balance transfer.
Balance transfer cards
Balance transfers allow you to move your existing credit card debt. They also charge you 0% interest for a set period of time to make it worth your while. This makes it much easier to clear your debts.
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 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, as rates are often at the standard 17% APR.
If you’re using these cards to clear your debt, it makes sense to avoid putting new purchases on them. As that will only increase your debt. However, if you’re confident of your finances, a 0% purchase card could come in very useful.
0% purchase cards
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 finance deal in a shop. With your own 0% credit card, you have a lot more control over what you pay back. Finance in shops is much more rigid and incurs more penalties in the case of non-payment.
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 with your card. You can then put the money into a high interest savings account and earn some interest on it.
To make the most of these cards you should aim to pay them off before the 0% period ends. So that you clear the whole debt before you need to pay any interest on it. If not, then 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. If you apply for credit and get rejected, you’ll get a further mark against credit record.
You can check your credit rating for free with a 30 day trial subscription to CreditExpert.
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.
If you’ve got significant debts, you should concentrate on paying them off before putting money aside in savings
If you can afford to, 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.
For more information, see our article on investing in stocks and shares ISAs.
On the other hand, you might want both a cash and a stocks and shares ISA. This is because ISAs are still better than putting your money into a tax-paying savings account. They can also offer you easy access to your cash. Useful for when you need to cover unexpected bills like costly car repairs.