What will the drop in interest rate mean for personal finances?

UK interest rates have been cut from 0.5% to 0.25% and the Bank of England has signalled that rates could go lower should the economy worsen.

The Bank announced a range of measures in order to stimulate the UK economy, including a £100bn scheme to force banks to pass on the lower interest rate to households and businesses.

The governor of the Bank of England has said that banks have “no excuse” not to pass on the lower borrowing costs to customers and will be charged a penalty if they do not.

There are 1.5 million tracker mortgages in the UK and the 0.25% interest rate means that a typical mortgage will be £22 a month cheaper though savers will feel the brunt of the drop in interest. £10,000 in savings will now accrue gross interest of £440 a year and net interest will be lower for taxpayers.

The Bank of England does not foresee a recession due to the measures (including the drop in interest rate) that it has put in place but unemployment could rise by a small amount for the next few years.

To read more about this you can see a report on the BBC website.

If you are in any doubt about what this will mean for you or you need further advice on your mortgage or savings then contact your financial advisor.

Managing post-Christmas debt

Some people will be dreading the first credit card after Christmas arriving but, instead of worrying or being stressed, it’s a good time to change the way you manage your money in the year ahead.
Work out what you owe by getting a clear picture of your debts. Work out the total amount that you owe on each credit card, store card and/or loan and start with the debt that has the highest rate of interest as this is your greatest liability.

The key words to remember are KNOWLEDGE and CONTROL.

Put simply, KNOWING how much money you have coming in and how much is going out. Once you know the exact numbers you have CONTROL because you can then look at how to change those numbers for the better.

It is important to know the EXACT numbers rather than have a “vague idea” about things.

It doesn’t matter what the numbers show you even if they show you are overspending. Once you see you are overspending you can look at how to cut back.

Record your spending for a month, particularly the cash you spend. How often do we take £20 out of the cashpoint and need to do it again the next day with no idea where that £20 went?

Write everything down on paper. It’s much easier to see and therefore easier to see where you’re spending too much money.

Put EVERYTHING down; don’t ignore it because it was a “one off” rather than regular expense. It’s the “one offs” that cause the problems and there will always be other “one offs” in subsequent months too.

It may be worth reviewing your utility providers in order to economise and bring down household bills and a visit to a price comparison site may well prove fruitful .

Changing your bank may result in lower charges or higher rates of interest.

It might also be worth investigating whether or not you can move your mortgage, as the loan on your property is the biggest debt you are likely to have.

Self Build Mortgages

Having decided to build your own home how do you go about funding it?

Paying for self-build projects is different from buying a ready made property as you fund the building work over a period of weeks or months and so there isn’t one big purchase to complete. Savings can help offset costs such as renting accommodation during the building process. You may also need a deposit of a larger percentage than for other kinds of mortgages.

Self-build is a relatively small market at the moment and there aren’t a wide range of standard mortgages too choose from. In order to get a mortgage you’d need to speak to several lenders to work out the best options for you and they will need to check the plans in detail before deciding whether to lend to you.

Funds from self-build mortgages are usually released in stages so that there is money available during the building process. The lender will carry out regular inspections to make sure that everything is going as planned before each instalment is signed off.

Self-build mortgages tend to be more costly compared to a standard mortgage for the same amount because there is extra involvement and administration for the lender though, of course, you may need to borrow less. People who self-build may be able to switch to a different kind of mortgage once all the work is complete.

Many people self-build because they want to make a home to stay on but, for those who do choose to sell and move on, the resale price could be higher than what it cost to build. This is money This is money (This link will open in a new window) estimates that the selling price on an open market could be as much as 20 – 25% more than the building costs. This depends on location, quality of the build and the state of the property market in general.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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Will you be a silver entrepreneur?

When old age pensions were first introduced, life expectancy was far lower than it is today and back then most people of retirement age had approximately five years to savour the meagre entitlements available, before dying aged, on average, 52.

For retirees today the years that follow the end of a working life are not necessarily counted in single digits but often decades and for many retirement is a time of new opportunities when a lifetime of prudence and investment in pension pots pays off.

With the advent of new pension freedoms enabling savers to draw down lump sums from their pensions without large tax penalties, it just may be possible that a generation of silver entrepreneursto emerge.

According to some statistics a tenth of retirees are now considering taking the plunge and setting up small businesses with their pension funds and, on average, the size of the pot they can draw from is £550,000.

A lifetime of expertise

For some, ending a career at 55 or 65 has meant abandoning a lifetime of knowledge and expertise acquired in what could be considered a valuable and important field so with new opportunities to use my pension to invest in a businessopening to entrepreneurial pensioners, these skills don’t necessarily have to go to waste.

It could be that once you retire you can establish the type of small business that you dreamed of and which may not even be related to your working life!

Some retirees, having been used to a busy life in business have found that a sedate retirement can be frustrating and there is evidence to show that just ‘giving up’ on retiring can be bad for both physical and mental health.

Getting Advice

The prospect of cashing in up to a quarter of an entire pension pot in one go to set up a small business can be daunting. Any investment is a risk and, even if you think the business idea is sound and likely to work, taking a risk when you are 35 is different from taking one when you are 65.

You not gamble more than you can afford to lose and for some people they can‘t really afford to lose any pension at all so seeking professional business and investment advice is essential.

Most local authorities run free business courses and they are always worth investing your time in but getting expert independent financial advice on your new business is also important.

Making the business as tax efficient as possible, ensuring that you have the right kinds of personal, professional and/or public liability insurance at the right price are the types of issues that a trained advisor can give you some guidance on.

Paying off your mortgage vs increasing your savings

In the past six years, the Bank of England has presented home owners who have savings with a dilemma that it is difficult to resolve.

The slashing of the base interest rate to 0.5 percent has resulted in falling rates on mortgages, making borrowing to afford properties cheaper but the savings slump has returned..

A property owner with spare cash might be less concerned about paying extra on his already cheap home loan, but also may feel he has less incentive to pour cash into a savings account that pays a low interest rate.

This blog doesn’t pretend to have the answers to this conundrum and couldn’t give advice even if it did. Instead we will explore the various options of home owners and savers.

Paying off the mortgage faster

By paying extra off your mortgage every month you are speeding up the day that you finally are able to live mortgage free and being able to limit the amount of time you spend in hock to the bank will have the effect of cutting down on the overall interest payments you make. It might seem like a sacrifice at the time, but the quicker the debt is repaid the less it costs you in the long run.

So why doesn’t everyone pay off their mortgages early? Most of us are fixed on spending in the moment and enjoying money while we have it, instead of delaying gratification for the future.

If you are planning to pay off extra on your mortgage every year then you need to make sure you can sustain the monthly committment.

Don’t commit to overpaying more than you can afford – start off with a conservative sum that you know will be easy to stick to and gradually increase it as the months go by.

For some the initial excitement and enthusiasm of paying extra wanes as the months go by and ambitions slip. Therefore, in order for overpaying to be a serious, realistic strategy it must be maintained over the long term.

Adding to savings

As mentioned above, the current financial climate is not one that suits savers. There are few incentives for the people who have spent years building up their nest egg as the rates of return, whilst higher than the base rate set by the Bank of England, they are generally far lower than they were before 2008.

So why save at all?

There are still reasons to save, it is always important to have emergency funds tucked away, irrespective of interest rates and if you put your savings in an ISA you will enjoy protection from taxation and accrue monthly interest.

The rate of interest is also unlikely to remain at the current historic low which means that in the next few years the returns on savings will inevitably improve.

The inevitable choice

As interest rates gradually increase, there will be an incentive both to save and to overpay on a mortgage and while savings will be better rewarded with higher interest, mortgage debt will be more expensive making it more important to repay it as quickly as possible.

Without a thorough audit of your circumstances and your financial strengths and weaknesses, it is difficult to know precisely which option to take which means that before you commit to either, it may be a good idea to get some independent financial advice.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Pension Tracking

Some things are so easily lost. Car keys, mobile phone, wallet, or your entire financial future.

At any given time a staggering five million people have lost track of their pension providers, like squirrels who bury acorns but forget where they put them.

The result of a lost pension may lead to a diminished income at retirement age and eventually the Treasury will benefit from the unclaimed wealth.

The government is keen for individuals to be as minimal burden on the state in their old age as possible have launched the Pension Tracing Service which will help to find missing pension pots but finding them is not the end of the story.

Reunited with your long lost pension

Pension pots need to be monitored in order to get the most out of them and to ensure your retirement is a time in your life you can enjoy.

Each pension pot that you have is subject to management charges and possible other annual costs. In addition to this, some of the pension pots that you have might not have been performing as well as others.

Not all pension funds accumulate wealth as efficiently as others and therefore it is important to closely scrutinise how well your money has actually been performing over the years. Once you have worked out which pension pots are performing and which are not, you need to explore your options.

Some pension plans might have benefits or guarantees attached to them, so make sure you know the long term consequences of any financial decision.

In addition to this, pensions that have a clause enabling you to retire earlier, or pensions that give you the option to draw down higher than normal lump sums cash free are also valuable and potentially worth keeping.

If you would like to review your pensions and assess the performance, it might be a good idea to seek some financial advice.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED

When do you need financial advice?

This blog post will, hopefully, help you explore some of the times when financial advice might make all the difference to your wealth.

First Home 

Before the 2008 crash, at the height of Britains property prices, the speed at which house purchase decisions were made reached epic proportions.

The availability of mortgages and other cheap credit in an economy based on an unsustainable housing boom resulted in countless first time buyers finding themselves, after the crash of the market, in negative equity whilst others found that when the sweetheart dealmortgage rate they signed up to ended, their home became exceedingly expensive. In both instances some financial advice might have prevented a lot of long term heartache.

The long term effect of negative equity or an expensive mortgage deal can be immense, being trappedin your property that you can only sell at a loss or saddled with a huge mortgage obligation should be avoided at all costs. You can often get mortgage advice from independent financial adviser as part of the overall cost of the loan you take out.

Marriage 

Getting married, sharing a home, and potentially having children together means that life insurance, wills and inheritance and the ownership of shared assets all have to be considered so it is essential to be realistic about the economics of marriage as well as enjoying the romance!

Accessing financial advice is important at this point, as there are countless life insurance policies, critical illness covers, and other provisions to cover your individual needs to choose from so having an expert who can guide you towards the best deals might well save you money in the long run.

Divorce 

Divorce will be a significant milestone for many so it goes without saying that during the complex and emotionally painful process of ending a marriage expert legal advice is necessary, but it is also important for both parties to have financial advice too.

You might experience a considerable decrease in your income as a result of divorce from your partner, or you might be the recipient of money in the divorce settlement and if you become the sole provider for any children from the marriage, you may need to consider your life insurance and critical illness cover. 

You might already have these policies but they may need to be reviewed in order to reflect the value of any maintenance payments you receive and a financial adviser can offer guidance on the most effective way of investing any lump sum from the divorce so it continues to grow in value, and possibly be used to pay for education and/or university costs for your children, or add to your own retirement fund.

Some divorcing couples also need to disentangle their pensions and here a financial adviser can be invaluable.

Retirement 

Making sure we have an income that will sustain us after our working life is over is something that many people put off until their 30s or 40s, but the longer you leave it, the more costly it becomes.

If you are just starting out on the road to planning your retirement and you have no idea about what choices there are or what pension products to buy, getting some advice is a good place to start.

If you already have a portfolio of investments and a variety of pension pots that you have built up yourself it might be important to find out whether you current pension providers or other investments are performing effectively, compared to the rest of the market. A financial adviser will be able to give your portfolio an audit and suggest whether or not your money could be put to better use elsewhere.

Knowledge is wealth 

The more expertise that is available to us, the better informed we are and the less likely we will be to make costly decisions that are not easily undone. Financially, we only have so many options, money, and time, to spend investing it, so it is important not to rely on pot luck.

So if you have a significant milestone in your life fast approaching, you might find it useful to talk over your options with an independent financial adviser.

Four tips for better finances

The decisions that you make about money have a direct impact on your life and so it pays (in every sense of the word) to get them right so here are four tips that can help you make the right decisions for you.

Who are you and what are your goals?

It’s a cliché to say that we’re all individuals but it’s also true and this is reflected in the decisions we make. Age and personality both play roles in the decision-making process, e.g. a child may want to save for a toy but the saving goal of an adult may well be something like the deposit on a property or planning for retirement. So we first have to know what we’re aiming for and whether they’re short, medium or long-term goals.

Don’t sweat the small stuff but don’t ignore it!

“Look after the pennies and the pounds will look after themselves” may be an old saying but it’s stood the test of time and it’s a fair point. Small costs can go by unnoticed and turn into a large amount over a period of time but people do lead busy lives and it’s a big challenge to keep track of every single penny. Take a little time and make adjustments such as taking a packed lunch to work or buying a refillable water bottle instead of buying a bottle of water each day and the savings will soon mount up.

Your personal wealth is your responsibility

As an adult you are responsible for your own health, wealth and happiness. This can seem a little intimidating but once broken down into manageable chunks you can create a budget that works for you. Make notes of renewal dates for mobile phone contracts, insurance, end of mortgage deals etc. and find a little time to look for the best deals for the significant purchases. Plan to ensure that you have some funds in hand to meet your medium to long-term needs be it large purchases or a retirement fund.

The right financial advice can more than pay for itself

Just because you’re responsible for your life doesn’t mean that you have to do it all alone – you are allowed to ask for help. If you look at the financial sections of the press or on website you can get confused by all the different pieces of advice and the huge amount of information that is just sitting there. Family and friend all have their own point of view about matters too and the idea of making a decision can become intimidating. A professional financial adviser can help you see what applies to you and explain jargon to allow you to make the right decision for you and in this way their advice can be, quite literally, invaluable.

It’s never too late for New Year resolutions…

It’s almost the end of February and those New Year resolutions we resolved to keep are now but a faint memory in the backs of our minds so is it too late to make a new one and improve your finances? Not at all!

Some people may still be paying for Christmas and have an eye on a holiday that they want to take this year yet are finding it a struggle to find the money. Even those on the lowest incomes waste money and yet a few simple measures can really improve your bank balance.

Hands up if you buy a sandwich for lunch every day! Quite a few of you and I bet that sandwich costs you at least £2. That £2 a day (presuming you work a 5 day week) amounts to ~ £500 a year so doesn’t it make sense to make a sandwich the night before and take it with you? That annual saving would go quite a way to paying for that holiday you need wouldn’t it?

Another way of saving money is looking at what you actually buy when you do your weekly grocery shop instead of what you think you buy. This takes a bit more effort than making a sandwich to take to work but it’s worth taking the time to do it.

For four weeks keep the receipts from your weekly shop and look at exactly what you’ve bought. Break it down into sections such as fruit & veg, meat, treats etc. Write it all down in a book and look at what you’ve spent. Do you really need all those crisps/chocolate/ready meals or whatever it is you’re shocked to see you’re buying? Even after doing this for just one week you’ll, more than likely, rein in your spending and should make a saving straight away. On subsequent weeks you will probably be able to see where bigger economies can be made especially if you challenge the “brands are better” style of shopping!

Likewise, think twice before taking the car out for a short trip. Is it really quicker to get the car out and drive a short distance or would it be equally as quick to walk? It will save you money and get you that little bit of extra exercise! Wouldn’t it be great to be on the way to that body transformation you promised yourself when you wrote your New Year resolutions?!

So what to do with all that extra money you’re not spending? Take a look at my blog post here on saving and put that money to really productive use and congratulate yourself on being a little more money savvy than you were this time last year!

What is equity release?

Equity release is simply the process of converting money tied up in property (known as equity) into cash. This can be done at any stage in life but the term “Equity Release” is now more associated with older and/or retired people. They tend to be asset rich and cash poor. They have lived in their property for many years and the value has shot up. However sometimes they have very little income so struggle to make ends meet.

It is possible to release some of the equity in order to help cover their day to day living expenses.

Equity Release can also be used for other purposes. It may not be possible to get a traditional mortgage because of age or other restrictions. Some people release equity to fund improvements to the home or allow them to go on a holiday. The money that you release can be used for any (legal!!) purpose.

This is definitely an area where you need to take independent advice. Find a local Equity Release adviser through unbiased.co.uk.

There are two main types of Equity Release; there are Lifetime Mortgages which allow you to borrow money against your house and there is Home Reversion which means you sell a share in your house.

With Lifetime Mortgages interest is charged but usually nothing is paid back on the loan until you either sell up or die. The interest in compounded over the whole period of the loan which means the debt can escalate more quickly than you may expect.

Home Reversion schemes are where you sell a share of your property to the provider for less than market value. You retain the right to stay in your home for your lifetime if you wish. When you die or move into long term care and the property is sold then the provider gets the same proportion of the sale price as the amount you borrowed. This means that if you borrow 50% of the value of your home that is how much the provider will get when it is sold.

Lifetime Mortgages are available from the age of 55 but Home Reversions can only be taken out by people aged 65 or older.

Equity Release isn’t a cheap way of raising money and it’s very expensive compared to a conventional mortgage.

There is a lot more to say about Equity Release but hopefully this will be a useful starting point.