Debt

Financial Advisers Advice:

Debt is fine. Inappropriate or badly borrowed debt is not. Interestingly we are now beginning to show all the signs of the over expansion of the economy a few years back. Things got a little heated and it was always clear that this would have a knock on effect. Mortgage arrears have now begun to increase for the first time with 105,990 people failing to make payments. Repossessions are also on the increase with over 10,000 homes being taken away from their owners. The final straw is the amount of county court judgements (CCJs) being issued. In 2005 there was a total of 573,231 CCJs issued. This will generally make it much more difficult for the individuals to solve their own scenarios but there is a solution. I notice bankruptcies are now at an all time high with 30% more people going bankrupt than the year before.

So what are the potential solutions? With debt breaking through the £1 trillion mark in May (£9.3bn was borrowed in May alone to buy homes) consumers need to be savvier with their borrowing. 9.1m people were refused credit in 2005 and that number will soar if the consumer does not take the appropriate steps. The situation has got so far out of control that today over 1 million pensioners are in debt.

If you find yourself in debt, consider a number of factors: Firstly the difficult part – curb your spending. Credit cards are often described as something that ‘ buys stuff you don’t need with money you don’t have’. It may sound a little rich but really ask if what you’re buying is solving anything.

After that, cut down the interest rate you are paying. Credit cards are a very expensive way to borrow money. Consider adding all your capital together in one loan to reduce the payments. You could consider a mortgage that reduced the payments for two years to allow you to get back on track and create some savings. You can actually borrow at 1.99% fixed for two years today. This would give you a mortgage payment of £166 per month for a £100,000 interest-only mortgage. This may give you the space to manage your situation better.

Make sure your mortgage interest is calculated at least monthly so the debt is reduced accordingly. If you are saving into an endowment policy but have excessive debt at a high rate, consider encashing the endowment to repay the debt. Afterall if the endowment is returning 7% and the debt is costing you 15%, you are worse off by 8% per year. If you are concerned about your endowment, check to see if all future payments to it plus the surrender value will pay off the mortgage quicker. Do not encash the plan unless you get advice. Consider the possibility of auctioning your endowment to get a bigger value, as some companies are keen to buy such arrangements from you. There is simply the possibility that a company will offer you a bonus on top of that offered in your surrender value from your insurance company.

Never ignore communication from someone chasing you for debt. It’s best to communicate despite the pain. A court is not going to look favourably on someone who hides from their problems, as painful as that may be. Be careful of the companies who are offering their services to you for colossal fees of up to £3500. A good IFA will tell you in advance what you will expect to pay, and hold your hand through the process. Only use an adviser who offers you a whole of market option and ignore the twaddle communication where the adviser tells you they are tied to one to five providers to get the best deal for you. It’s not true.

Expert’s view: Score 8 out of 10.

Excellent. Consider however that a loan not secured on your property, which is added into your mortgage, is now effectively secured on your property.