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By Richard Evans
So could you cope if the economic weather turned stormy? Now might be a good time to subject your finances to a bit of "stress testing". If you start planning now, you will be in a much better position to meet any troubles in the future. "Be clear about where your money is going - take a long, hard look at your finances, work out all your income and your spending and look at whether there is any room to cut back or make savings," suggests Citizens Advice, the charity. "Don't live on the margins of affordability, where it only takes a small change in circumstances to tip you over the edge into debt." And if you are thinking of borrowing, it says, think carefully about how you would manage the repayments if interest rates rose or you suddenly found yourself out of a job. "You need to be over 40 to remember the last recession," says Mark Dampier of Hargreaves Lansdown, the financial adviser. "An awful lot of working people won't remember one - they've always thought the good times would last for ever, and borrowed as much as they could. But it is always a good idea to keep debt low. My advice is: if you're self-disciplined, pay off any credit cards straight away; if you're not, don't have credit cards at all." He says everyone should build up a "safety net" of savings worth three to six months' salary, which can tide you over in the event of redundancy until you find another job or become eligible for state benefits. This money should be readily accessible; a cash Isa is ideal, as the interest is usually generous and will be paid tax-free. Most people's number one priority is keeping the roof over their head.So one option in uncertain times is insurance to cover your mortgage payments. A number of different products are available; click here for our recent article on this subject. But if you are considering insurance, read the small print very carefully, as there are often exclusions that could make the policy worthless - the self-employed, for example, won't normally be covered if their work dries up. "This type of insurance is unusual in that you can make some sort of judgement about the likelihood that it'll be needed," says Ray Boulger of John Charcol, the mortgage broker. "For example, it may be worth buying for those in low-skilled jobs in areas where there is not much alternative employment. But if you've got the skills to get another job easily, you may not need it." There is another way to prevent falling behind on your mortgage, says Mr Boulger. "If you have a flexible loan, consider making overpayments now - this way you can make underpayments or even take a payment holiday later if you lose your job, say. If you end up not needing to, you haven't lost anything." Some loans allow you to borrow back all the overpayments you've ever made, providing a useful safety net if you can't meet the repayments because of a fall in income. "Many people have this kind of flexibility in their mortgage without realising it," adds Mr Boulger. "One way to make overpayments painlessly is to maintain your previous monthly payment when the interest rate falls." Alternatively, he says, use any windfalls such as work bonuses to make a one-off overpayment - again, a flexible mortgage allows you to borrow this money back if you need to. Remember that lenders are sometimes refusing to cut their interest rates when the Bank of England reduces the base rate, because the credit crunch has increased their funding costs and put pressure on their own finances. But if you have a tracker mortgage, the lender is obliged to pass on the Bank of England's reductions. "Other things being equal, always go for a tracker, so that the lender has to pass on any rate cuts," says Mr Boulger. "If you are on their standard variable rate, they can do what they like. Or, with the money markets pricing in further falls in interest rates, a fixed-rate mortgage could also be a good deal - the decision is finely balanced at the moment." But you won't get the best deals, on mortgages or other types of loan, if your credit file isn't in tip-top condition. "A good credit rating is always important, but never more so than now," says Mr Boulger. "If you have any adverse history, the cost of a mortgage has gone up substantially and you may not be able to borrow more than 75 per cent of the property value. "If you are coming off a fix you could be unable to remortgage and get stuck on the standard variable rate, which for sub-prime borrowers could be in double figures and not affordable. Unless the existing lender offers a new deal, the only option is to sell up - it is better to do this than be repossessed, which saddles you with extra costs, a lower selling price and the worst of all sins on your credit rating:repossession." He recommends fixing any adverse credit history as soon as possible.For example, if you're settling a county court judgement at £25 a month, pay it off in full now instead, if you can. As the interest is frozen, many people just pay these debts off as slowly as possible, but settling early is better for your credit rating. Once you've made all your preparations, what should you do if disaster does actually strike later on? Give top priority, advisers say, to the payments where default has the most serious consequences: your mortgage or rent (to avoid losing your home); utility bills (so that you're not cut off); and council tax, fines or maintenance to ex-partners (where non-payment can land you in court). Only then should you spend money paying off "non-priority" debts such as loans, credit cards or benefit overpayments. Expert help is available if the worst does happen - and you won't have to pay for it. "The key thing is that if people do lose their job or suffer other sudden serious loss of income, they will need individual advice on entitlement to benefits, tax credits and dealing with any debts they may have," says Moira Haynes of Citizens Advice. "It could be from a Citizens Advice Bureau or other free, independent advice centre. The CAB can advise on entitlement, do benefit calculations and help people make a claim." Contact lenders as soon as you realise you may have a problem keeping up repayments. Most are required by regulators to deal with people in financial difficulties sympathetically and positively, so you may be able to reach agreement on freezing interest or paying an affordable amount, for example. If lenders can see you making an effort to pay at least something, you are much more likely to get a helpful reaction. "Talk to your mortgage lender as soon as possible if you can't make the full payment," says Mr Boulger, "but give your mortgage broker a call as well. If you have borrowed a large proportion of the value of your home and have little equity in it, lenders may be more interested in safeguarding their own interests. But a broker will look after your interests - and if you call them early, before you've actually fallen behind on your repayments, they may be able to arrange a remortgage to a lower rate or a fix." Alternatively, he adds, the lender should at least allow you to pay just the interest on your home loan while times are hard - "I don't know of any that won't". Useful links: |
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