The new year is now well underway and the excesses of Christmas have been tidied away, leaving many facing an uncomfortable level of debt. Much of this is likely to be unsecured debt such as credit and store cards. Falling behind with this sort of payment is bad enough, but if you become unable to keep up your mortgage repayments you endanger the very roof over your head.
New year, new start.
The new year is one of the busiest times of year for brokers offering debt advice, as Nigel Griffith, partner at Swindon-based Britannia Loans and Mortgages, explains: “People tend to put a lot of their spending onto credit and store cards in the run-up to Christmas, and may also take out some small loans. The bulk of their debt will probably have built up gradually across the whole year, but the new year is often the catalyst for action, when the bills start to come in and they realise something needs to be done.”
Christmas shoppers, despite a late flurry, actually spent less in 2005 compared to the year before, with many shoppers hanging on for last-minute bargains and making an effort to save in advance. Ian Giles, director of marketing and strategy at lender Kensington Mortgages, says many people will nevertheless have run up significant debts. “Whether the seasonal spending trend is up or down, every year tens of thousands of people are in financial difficulties come January.”
Part of the problem, adds Griffiths, is the ready availability of credit on the high street. He says: “There has been some irresponsible lending from some credit card companies, who will raise credit limits automatically, encouraging borrowers to get further into debt.”
Which way now?
So what should you do to get your finances back on track? First of all, don’t panic or bury your head in the sand. Talk to your creditors, especially your mortgage lender, as soon as possible – they could be more sympathetic than you might expect.
Ensure you keep on top of your priority debts, such as mortgage, utility bills and council tax. DonÂ’t stop payments without explaining why. The worst thing you can do is nothing.
Giles says: “The last thing lenders want to do is repossess you, they will do their utmost to help keep you in your home. Talk to them about the possibility of rescheduling your debt. They may let you reduce your payments temporarily, for example, switch to just paying off the interest for a while. It is important to pay something, even if it is less than the interest payments, as a show of good faith.”
If you have equity in your property – in other words the part of your property you own, because your mortgage is less than the value of your home – you have several options open to you. You can remortgage to another deal, possibly with a different lender, to release some equity. While this will increase your mortgage balance, it will allow you to pay off your expensive unsecured debts.
The second option is to borrow more from your existing lender, a facility that many offer. This is more efficient than remortgaging, which involves significant paperwork and fees.
Secured loans.
But some people will not be in a position to take either of these routes. They may not have any equity in their property, or may have run up adverse credit such as loan defaults or County Court Judgments, perhaps as a result of major lifestyle change such as divorce, or switching from being employed to self-employed, making income difficult to prove.
If you are in this situation, you might choose to take out a secured loan. This will be charged against your property, and is sometimes called a ‘second-charge mortgage’. There are plenty of providers in this increasingly competitive market, so seek the advice of a broker or your local Citizens’ Advice Bureau.
Bob Sturges, director of communications at Money Partners, a lender that only lends through mortgage advisers, says: “An increasing number of people are falling into this category. A secured loan will be slightly more expensive than remortgaging or a further advance, but is still a much better option than unsecured debt.”
The advantage with secured loans is that decisions can be taken and cases processed very quickly. Paperwork is kept to a minimum, and there is no valuation or legal process. Griffiths says the average secured loan size is now around £25,000. “We have processed cases in just a week, which is ideal if someone urgently needs to pay off some debt quickly.”
These loans can have long terms, often up to 25 or 30 years. However, most borrowers manage to pay them off long before then.
Gerry Bell, head of mortgage marketing at GE Home Lending, says: “Many people manage to pay off the debt within a few years. The important thing is acting as soon as possible to get your monthly outgoings under control, and being honest with yourself about what you can afford.”
CASE STUDY:
Builder Andy Scarrott and his wife Karen from Bicester, Oxfordshire, ran up around £65,000 of debts on several credit and store cards and decided that they had to act before the situation became any worse. The couple spoke to their broker, Britannia Mortgage and Loans, which helped them arrange a £75,000 secured loan with lender First Plus, consolidating all their debts into one monthly payment.
The loan made a huge difference to their repayments, which fell from a daunting £1,900 per month to a more manageable £759. The loan term is 180 months (15 years), although Andy is confident of being able to pay off the loan long before then.
He says: “Our credit and store card repayments were starting to cost us more than we were earning each month. Taking out a secured loan has more than halved the amount we are paying out.”
Andy believes consulting a broker is a vital first step for borrowers in this situation. He says: “Britannia dealt with us extremely quickly, and the loan was in place in a week. My advice is, don’t panic, do something about it. We now know not to repeat our previous mistakes. We have cut up most of our cards and are more aware of how different interest rates can be on the various credit and store cards.”
