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Should banks tell you how to spend your money?

Chris Torney says that plans by banks to advise struggling mortgage borrowers on how to manage their spending might just be a step too far.

I’ve got a pretty good idea how I’d react if my bank started telling me how I should and should not be spending my hard-earned money.

But  A report this week suggests that the day when my current account or mortgage provider rings up to suggest I take a more modest annual holiday, or stop blowing so much cash down the local pub, may be fast approaching.

An article in the Daily Telegraph revealed that officials from UK Asset Resolution (UKAR) — the official body set up to recover the taxpayers’ cash spent bailing out Northern Rock and Bradford & Bingley — were conducting a review of both firms’ mortgage customers to see which were at greatest risk of missing repayments when interest rates finally start to rise.

Over the next few months, these individuals can expect a phone call advising them how to “manage their finances” should their mortgage costs increase.

Prioritising cutbacks

UKAR boss Richard Banks told the paper: “Some people won’t cope when interest rates rise, but for others there are remedies.

“They need to think about what is their most important debt. It is not their credit card or renewing their Sky subscription, or going out for the latest mobile technology. It is their mortgage.”

Intentionally or not, this statement rather gives the impression that customers will be encouraged to cut back on life’s luxuries if they’re in danger of missing mortgage repayments.

In a way, Banks has a point. It is fair to say that many homeowners fail to realise how important it is to work out which bills most need to be paid when push comes to shove.

The worst than can happen when you fail to pay a credit-card bill is that your interest costs will mount up, you’ll incur a penalty fee, and you’ll get a black mark on your credit record.

But miss a few mortgage payments and you and your family could be kicked out of your home.

Why do borrowers get it wrong?

There are a number of possible reasons why mortgage customers fail to recognise the importance of keeping up with home-loan repayments.

If you fail to settle a monthly mobile-phone bill, say, the company in question may be much quicker to fire off a letter threatening debt-collectors and court action.

And of all the bills to skip, missing a mortgage payment will probably save you the greatest amount of cash.

So explaining why a mortgage should be the top priority could be a good idea if it helps struggling borrowers put their debts in perspective.

Is this the right approach?

But what UKAR appears to be planning goes way beyond this. It’s hard to see customers reacting in a positive way to a UKAR official calling out of the blue to tell them that a) they’re considered to be a “high-risk borrower” and b) they need to stop spending money like water.

I’d suggest a better approach is to stick to highlighting the risks of skipping mortgage payments rather than focusing on individuals’ spending habits.

UKAR is within its rights to explain to borrowers the potential consequences of their actions (or lack of action). But going any further is just too intrusive.

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