Mortgage repayments, personal loans, credit cards and HP agreements are often sold with the option of also buying Payment Protection Insurance (PPI). The insurance is designed to pay out if you are unable to meet the repayments, if you were to lose your job or fall sick for example. However, many people do not know exactly what their policy covers, or under what circumstances they would be eligible to claim. You need to know in case you something happens that may result in you struggling to repay a loan or mortgage.
Why not check your agreements or get in contact with your lender now?
The Financial week
On Tuesday this week a BBC Radio 4 survey revealed that many people are being advised by mortgage brokers to lie about their incomes when seeking a mortgage. This problem had been previously undetected because more than half of the riskiest mortgages, those in the sub-prime market, are self-certification mortgages.
Self-certification mortgages allow borrowers to declare their own income and in some circumstances lenders often don’t check the information given. While the Financial Services Authority has stated that it will “crack down on this abuse” – and have, in fact, already banned brokers that knowingly advised overstating an applicant’s income – it is important that you also take action and refuse to listen to any broker who advises you to inflate your true income. While a larger mortgage can seem like an attractive option if you’re struggling to finance a bigger house, there’s a very real risk that you won’t be able to meet your repayments. This could lead to you becoming seriously over-indebted. If you are thinking of taking out a mortgage it would be a good idea to use the moneybasics Mortgage Calculator to obtain an approximate figure of the amount you can afford to borrow and how much your monthly repayments would be.
The Bank of England’s decision to raise interest rates over the last year to their current level at 5.75%, coupled with the recent credit crunch, has resulted in some organisations holding a negative outlook for the housing market. On Wednesday, Barratt – a house building firm – predicted that the housing market would slow in the next few months. This was announced in a week when sales of their homes fell almost 10% on the back of Northern Rock’s problems.
The Organisation for Economic Cooperation and Development (OECD), which represents the thirty-three most advanced industrial economies, stated on Thursday that it believes the housing market is the UK’s “greatest vulnerability”. On the same day, data published by Nationwide showed that annual house price growth slowed from 9.6% to 9.0%, its lowest in almost a year. The average house price in September rose to £184,723 from £183,898 in August, an increase of 0.7%. While house prices are still increasing, they are now growing at a slower rate.
Nationwide also warned that the increased costs that banks are experiencing as a consequence of the credit crunch will result in more expensive mortgages for seemingly risky customers. However, a Bank of England survey released on Wednesday shows that although lending conditions for businesses have been tightened, lending conditions for households have remained mostly unchanged. The research was conducted between 20th August and 13th September 2007, therefore taking into account recent effects of the global credit crunch. Lenders also said that they expected the amount of secured and unsecured credit available to households not to reduce over the next three months, although they did say that they were going to tighten the criteria they use to assess credit card applications.
While the Bank of England survey results seem to suggest that lending conditions over the next threemonths are unlikely to get worse, interest rate rises over the last year and stricter risk management by big lending organisations mean that we already have a situation where loan repayments and banking fees are higher than we have seen in the recent past.
These extra costs need to be factored into the budgeting process. It may seem irritating or boring to spend 10 to 15 minutes once a month making sure that your budget is up-to-date, but it is vital because it will help you to see if there is going to be a cash shortfall. This will give you the opportunity to think about other ways to increase income or reduce expenses before it is too late, Keeping a regularly updated budget is an essential part of avoiding the pains that result from unmanageable debt. Why not check out the budgeting section now to learn how to draw up a financial statement now.
Wednesday 13th June
Base rates set to rise
Mervyn King, Governor of the Bank of England, warned this week that further interest rate rises could leave borrowers struggling to meet their repayments. “Anyone who borrows at a variable rate should recognize that the interest rate they will pay in the future may vary.”
King’s warning comes at a time when borrowing is at an all time high. Total mortgage borrowing amounts to £1.1 trillion, with the average family owing £102,000. This could mean a monthly increase of £58.83 for borrowers if their current variable rate mortgage increases from 5.5 to 6.5 per cent over the coming months.
Friday 15th June
The week ended on a high note as two more utility companies cut their prices for gas and electricity. That means that all the big six UK gas and electricity suppliers have now cut bills since wholesale energy prices started to fall last year. Good news!
Prepared for Moneybasics by Jason Taylor