Reader Writes:
I was wondering what protection I have as a consumer, both in terms of my savings and also my mortgage if the society I am using fall into trouble. I was also wondering what I should consider as I am re-mortgaging and want the best terms and fees.
On the 1st of October 2007 the FSA increased the protection for customers to 100% of the first £35,000 they had invested. This is a mild increase from the previous cover which was £33,000. Be careful to spread your money on deposit with as many societies as you can to keep the risk down, as you can claim the protection for each £35,000 you have with any society. Be careful also to ensure you don’t have your capital with a subsidiary of a society as this will only afford you the protection once.
As for your mortgage lender, it would be nice to think that if they had run into difficulties they would simply forget your loan, and tell you not to bother paying it back. Unfortunately not. Basically you would be unaffected as your loan would be sold off to another lender on the same terms as you had contractually agreed. Most importantly you wouldn’t be forced to settle the debt earlier.
Now clearly there could also be a situation where the lender wasn’t the original source of funds. Take Northern Rock for example. It was, and still is, a perfectly good business which unfortunately had a hole in its business structure – it borrowed from elsewhere to lend to customers. What happens if they had gone under but your borrowing was with another lender? Once again, both you and the lender would be bound to your contract. It’s very likely in any event that the loans would have been securitised and sold on, so your debt still applies.
Customers with an equity release plan, or lifetime mortgage as they are now called, may feel particularly worried. After all, they have borrowed a large lump sum from a lender thinking it’s for life who then goes under. The last thing you want at that stage in life is to have to go through the hassle of refinancing your equity release scheme. Good news, however, as once again the same applies, as the debt would be sold as an asset to the purchaser of the failed lender. Northern Rock was a market leader in the equity release/lifetime mortgage arena, but has now virtually priced itself out of the market in terms of new business. Existing customers should be fine, and new customers will probably see a more competitive pricing post any takeover.
As for your re-mortgaging question, consider this very carefully. We are probably at the peak of the interest rate cycle now and it’s likely that the next rate change will be southwards. Consider very carefully before fixing your rate as you may well find yourself fixing above a falling rate. Interestingly, banks have already begun to drop their savings rates in preparation for the inevitable rate drop in the New Year. This, of course is frowned upon, as they have simply increased their margins because they are still lending at the higher rate, but providing the savers with a lower comparative rate.
Consider any fees you have to pay carefully. We are finding lenders are becoming protective of their customer base and offering better terms to keep them. Go to an Independent Financial Adviser and see what they can put together for you. They should look at your existing mortgage and see if it can be beaten by also taking into account any extra fees that need paying. Don’t allow the overall cost of the fees to be hidden inside the loan. That is often a way of disguising the true cost of a mortgage and may mean you moving when you don’t need to. Be careful also of putting unsecured loans onto a mortgage. Whilst payments may be lower defaulting on an unsecured debt would not mean losing your property.
For advice on re-mortgaging call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on mortgages
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’
For lifetime mortgages to understand the features and risks ask for a personal illustration.Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
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