Mortgage Advice

UK Interest Rates and Importance of inflation

When setting interest rates, the primary objective of the MPC is to control inflation. The MPC have an inflation target of CPI 2% =/-1. This is why The Bank of England is concerned with rising inflation. It explains why interest rates may remain high, even if growth slows down.

Central Banks are concerned about rising inflation for the following reasons:

1. Uncertainty / Confusion

Higher inflation creates uncertainty about the future revenue and costs of firms. Therefore, firms become less willing to commit to investment decisions. This can dampen economic growth in the long run. Uncertainty can also extend to consumption and discourage consumer spending.

2. Domestic Goods Become less Competitive.

Higher inflation in the US, would make US exports less competitive. This would result in a fall in exports and a deteriorating balance of payments on the current account. If exports are less competitive it will put further downward pressure on the dollar, causing imports to be more expensive.

3.Inflationary growth is unsustainable.

High inflation is an indication that the economy is overheating. This means that the economy is growing above its long run trend rate and therefore is unsustainable. If growth is too fast it is likely to result in a recession - Boom and bust economic cycle. Generally the Fed wishes to avoid volatile economic growth. It is better to keep inflation low and growth sustainable.
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Mortgage options when struggling with repayments

Rising interest rates in the UK and US have meant that an increasing number of householders have been struggling to pay their mortgage payments. If you find yourself in the this situation these are some possible responses.

1. ReMortgage.

This is the first option that you should consider. Many homeowners remain on the lenders standard variable rate and therefore pay a relatively higher interest rate. If you remortgage, banks offer more attractive interest rates to try and attract your custom. If you are currently fixed into a mortgage deal, work out the earliest that you can leave without incurring exit fees. This will give you an idea of how long you need to manage paying the existing mortgage payments. If you know you are able to reduce your payments in 7 months it may help your financial planning.

2. Extend Mortgage Term.

In the long term extending your mortgage term, will result in higher interest payments. However, if you do extend your mortgage term, you will be able to reduce your mortgage payments by a certain amount. This can help deal with the short term problem of affordability. In a few years, your situation may change and then you can look at paying off your mortgage earlier. I would say extending your mortgage term, is much preferable to defaulting on existing mortgage payments. Personally, I decided to increase my mortgage term from 31 years to 47 years. Here is why.

3. Reduce other Expenditure.

Everyone has some scope for reducing their expenditure. Take a look at the highest outgoings and then try to reduce the least essential. This reduction in spending need not be permanent; it may also be instructive because you can find out what you don’t need to spend money on.

4. Switch to Interest Only Payments.

Switching to interest only payments will again reduce your mortgage repayments, possibly by 20%. The drawback is that you will not be reducing the mortgage capital. But, remember if your income rises each year, the mortgage will become a smaller % of your income in the future. Therefore, see interest only mortgage as a temporary solution to a temporary difficulty. Try to switch back to a repayment option in a couple of years.

5. Rent A Room

Renting a room can provide extra income to help pay the mortgage.

6. Flexible Mortgage.

Some mortgage payments allow for a temporary mortgage holiday, where you don’t make any payments. However, this flexibility usually requires a period of prior overpayments. A flexible mortgage is not a long term solution to basic unaffordability. It is only really an option for a very temporary short fall in income.

7. Speak to Your Mortgage Lender.

If you have difficulties with repayment, speak to your mortgage lender, BEFORE you default on payments. If you speak before, they may be able to offer a temporary arrangement to help make repayments more affordable. Also it will help protect your credit rating. If you default without giving warning it will be very harmful to your credit rating. If you let them know, it will be much less damaging.

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Northern Rock and Remortgaging

This week Northern Rock is likely to see savers flock to the bank to withdraw their savings.

Last week, Northern Rock suffered a severe credit shortage. As a result they had to borrow emergency funds from the Bank of England to ensure liquidity for its mortgage business. The last time the Bank of England had to act as lender of the last resort was in 1973. Although the FSA and Bank of England said there was no chance of the bank going under, savers appear not to have been pacified, as a result £2 billion has already been withdrawn.

The problem of Northern Rock originated from the fact their mortgage lending was not secured by customer savings. Instead they borrowed from financial institutions. This was fine when the markets were doing well. But, since the sub prime collapse in America, lending has become a lot more conservative. As a result Northern Rock couldn’t get enough temporary funds.

Where does this leave Customers with a mortgage at Northern Rock?

Firstly, it is unlikely the bank will go under. It is in the interests of the whole UK banking system to prevent a bank going under. This will make future panics more likely. It is essential for the Bank of England to maintain confidence in banks and the financial system. Without rock solid confidence, the banking system will find it difficult to function.

Therfore, at the moment I would suggest those with a mortgage at Northern Rock, need not panic and seek to switch accounts.

It is quite possible the crisis may result in Northern Rock will be taken over by a bank like HSBC. IF this occurs it is of course essential to check if your mortgage changes and remortgage if appropriate.

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Debt Reaches Record Levels in the UK

The total amount of debt owed by the British is not a collective £3,345bn. This is more than the country’s gross domestic product and is the highest on record.

The debt levels have been increasing because of:

• Relaxed lending criteria, especially in the adverse credit market
• Low medium term interest rates. - A period of low inflation has enable UK interest rates to be low for a long time. In 2003 interest rates fell to 3.5%, encouraging consumers to take on more debt.
• Changes in social attitudes to debt. Debt is becoming more a factor of life and people are increasingly expecting to have to borrow. A good example is student loans and student debt.
• Long period of economic growth and the consequent increase in consumer spending.

The Citizens Advice Bureau have said that the number of problem debt cases have jumped by 20 per cent since this time last year. The British Retail Consortium have stated that this could be a difficult year for UK retailing.

Why Debt is becoming more of a problem

• Interest rates have been increased 5 times to 5.75%
• There is a global credit crunch as a result of the sub prime meltdown. Just recently the Bank of England had to intervene and lend money to the Northern Rock building society. link
  
• Slowdown in house price growth

How to effectively reduce debt

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Growth in UK Sub Prime Mortgages

UK House prices are increasingly unaffordable.A first-time-buyer with an annual salary of £25,899 would now have to save up to £25,600 for the deposit on a typical home. This is nearly 96% of their income. This is made more difficult by the fact many graduate first time buyers leave university with debts of upto £10,000.

If they did manage to get a mortgage, they would need to spend 45% of their take home pay on a mortgage. Leaving little room for other expenditure. It also means that they will be very sensitive to interest rate increases.

Because of the increased difficulty of getting their first home people are increasingly looking to unconventional mortgages as a way to be able to buy their house.

These unconventional mortgage are often lumped together under the category sub prime mortgages. These mortgages include:

Interest only Mortgages. - Reduce the monthly repayments but leave the homeowner requiring another method of paying back the debt.

Bad Credit Mortgages - Lending to people with bad credit histories. The chance of defaulting is higher and as a consequence banks charge higher interest rates. This is often the most profitable area of the market, but the experience of the US sub prime mortgage sector shows that small changes in interest rates can lead to significant problems such as defaulting on repayments.

Many of the sub prime mortgages are characterised by a special introductory offer. For the first 2 years, homeowners are given an attractive interest rate. But, then they are tied into a higher rate. It is often when this occurs that they struggle to be able to afford payments.

Bad Credit Mortgages

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Remortgaging through self certification

Self certification is often associated with the sub prime / bad credit section of the mortgage industry. However, in practice self certification mortgages have become increasingly main stream in recent years. Evidence suggests that the self certification market is likely to continue its growth.

Traditionally self certification mortgages are aimed at actor, sportsmen, - the self employed who have a volatile or hard to prove income. In these cases a self certification mortgage is often the best way to get around rigid lending criteria.

However, employed people may also find that using self certification mortgages are the best way forward.

See: who is eligible for a self certification mortgage 

If you took out a sel certification mortgage with a relatively low deposit, chances are  you will be facing interest payments higher than most mortgage deals. If your house price has risen giving you a greater share of equity, make sure you take advantage of any possible remortgage. A new deal is likely to have lower interest payments because you have proved a steady period of repayment and now have more equity in the house.

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How do I pay off my mortgage fast?

If you wish to pay off your mortgage quickly there are various options that you can take. It is worth remembering that paying off your mortgage early can save you a significant amount of money in lower interest payments. However, it requires a commitment to increase repayments in the early years of your mortgages. For some first time buyers in the UK, this may be difficult to achieve. However, for those who are determined to pay off their mortgage early these are some of the most popular methods.

1. Flexible Mortgage.

Firstly to pay off a mortgage early, it is necessary to have a mortgage which enables you to make early repayments. Flexible mortgages are increasingly being offered in the highly competitive mortgage market. Note: it is usually possible to combine a flexible mortgage with different types of mortgages, for example, it is possible to have a flexible fixed mortgage, or a flexible tracker mortgage. The important thing is to make sure you choose a mortgage where you are not penalised for making early repayments.

2. Discipline to save.

The most difficult part of paying off a mortgage early is finding the cash to pay the extra payments. It requires some kind of discipline or sacrifice. For example, each month you could have a target of paying £100 to the mortgage. This could be done by reducing monthly outgoings, or reducing other types of investments. The important thing is that if you can give these extra payments a high priority then it is possible to make a real difference in reducing your mortgage.

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Mortgage Advice: Future Trends in UK

Today’s rise in interest rates was the 5th increase in the past 11 months. It shows the MPC’s willingness to tighten Monetary policy to keep inflation within target.

Future prospects for Interest Rates

Interest rates could increase again this year. This is because of:

1. Evidence that firms are able to increase prices at both the factory gate and to consumers.
2. Evidence that UK consumers still retain a desire to borrow beyond their means. It is hoped that rises in interest rates will start to discourage prolific borrowing.
3. The MPC is taking a hawkish stance regarding inflation

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Opportunity Cost of Saving Money

For a festival of frugality one would expect to find numerous ways for people to save money. Saving money can actually become an obsessive art. If we are not careful we can spend all our time looking for ways to save the odd dollar and cent, and actually lose track of the wider picture. By all means seek to save money, but in mind these concepts:

1. Prioritise your savings.

Always start off by looking for the best way to save money. For example, if you are a homeowner, Remortgaging offers the potential to save a significant % of your monthly disposable income. As soon as you return to your lenders standard variable rate, make sure you have a plan ready to look for a better mortgage deal. Given the amount of money at stake, it is worth spending considerable time to find best deal.

2. Don’t Forget Time = Money.

It is important to place a value on your time. If you work out a rough hourly pay, you can decide whether money saving schemes are worth it. For an extreme example, you might be able to save $5 by digging up some well rotted horse manure. However, rather than spend 2 hours digging, you might be better off spending $5 to buy some. If you earn $50 an hour, don’t spend several hours saving the odd cent here and there.

3. No excuses for not checking premiums

At the same time, if you put a value on your time, there will be many occasions where it makes perfect sense to look into finding better deals. For example, you may feel you don’t have time to look for a more competitive home insurance deal. However, for 30 mins effort, looking online you could save perhaps $100. This works out at an hourly rate of $200. The only excuse for not having time is if you earn more than $200 an hour.

See also: saving time and saving money 

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How to Pay off your Mortgage Early

Paying off your mortgage can help save you $1000s of compound interest payments.

To pay off your mortgage early there are various things that we can do.

1. Be Determined

Make a determined effort to put money aside for paying off your mortgage early. It could be instead of paying into a savings account or pension

2. Remortgage

It is important you don’t stay on a higher rate than necessary. Look for ways to reduce interest payments. The best way is through remortgaging. Move your mortgage to a lower deal. Guide to Remortgaging

3. One Account Mortgage

The one account mortgage is a way of combining your mortgage payments with your current account. It means that any savings you have will be used to reduce  your mortgage payments. See more tips How to  pay off your mortgage

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