Check-in to money rehab and flush those debt toxins away
It’s that time of year again when you promise to make good on all those lapsed New Year’s resolutions you swore to 12 months ago, e.g. giving up smoking/drinking, losing weight and getting fit. But don’t just get yourself back into shape, do the same with your finances, especially if you overstuffed your plastic this Christmas.
To help with your recovery, here’s our five-step finance detox programme for a healthier 2008.
Detox Step 1: Remortgage
Detox Step 2: Switch Credit Card
Detox Step 3: Consolidate Debts
Detox Step 4: Life Insurance
Detox Step 5: Switch Banks
Detox Step 1: Remortgage
With Christmas out of the way and a recent rate reduction, this could be a good time to ditch your existing mortgage. Detox reasons to remortgage include:
- Save Money: If your mortgage special rate period is about to end, switch to a better deal to avoid paying your lender’s standard variable rate (SVR). The SVR is likely to be significantly higher than your discount rate so you could be in for a ‘payment shock’ as your monthly mortgage repayment jumps. Switching to a better deal could save you bucket-loads of cash.
- Cut Your Mortgage Term: If you’ve been comfortably paying your lender’s SVR, you could remortgage to a better interest rate while keeping repayments the same. This way, you’ll repay the debt sooner and could save £thousands in interest payments.
- Use Equity to Pay Off Christmas: If you’ve been paying the mortgage for a while or your home has gained value, you could cash in some of its equity. Increasing your mortgage releases this equity and the money can be used to pay off higher-interest debts such as credit cards, store cards, personal loans, overdrafts etc.
Of course, simply upping your mortgage will increase your monthly payments and you could end up paying more interest in the long run. The trick is to remortgage to a deal with a lower interest rate – easy to find if you’re currently paying your lender’s SVR. In this way, you can increase your mortgage while maintaining a similar level of repayment.
The Cost of Remortgaging
There will almost certainly be a fee for exiting your current mortgage to cover admin costs (likely to be around £100 - £300, check with your mortgage provider). Also, if your mortgage has an Early Repayment Charge (ERC), you’ll have to pay to remortgage. An ERC will likely last the duration of your special rate deal, but it may extend into the lender’s SVR period (known as an ‘overhang’). Your new mortgage may also have an arrangement fee, typically £500 - £1000, plus legal and survey costs.
So if you’re thinking of remortgaging, always seek expert advice and always do the maths – and if your long-term savings outweigh the short-term costs, then a remortgage could be worth considering.
For free and impartial expert mortgage advice, click here or call 0800 011 3819 and quote 'news'.
Detox Step 2: Switch Credit Card
If you’re paying tons of interest on a credit card, it’s time to grab a 0% deal. Switching to a cheaper card could seriously slash your bills, thus hastening your release from debt rehab.
The credit card market is highly competitive and there are plenty of tasty 0% transfer deals available, often with special rate periods lasting over a year. Some even offer a limited period of 0% interest on card purchases.
If you pay off your credit card in full each month, then a 0% deal won’t matter to you, in which case, find a card that offers the best reward or cashback perks. Rewards can include airmiles, redeemable points, money off your Sky TV bill, or even cash off a new Vauxhall or Saab. Shop around to find the best deal for you.
Tips for healthier plastic in 2008
- Always pay more than your monthly credit card minimum - only paying the minimum means your debt will take years longer to clear and you’ll end up repaying far more than you originally borrowed.
- Don’t be tricked into getting deeper into debt - credit card companies have a habit of automatically upping your credit as you approach your spend limit. Tell them not to do it unless you ask.
- Never take cash out on a credit card - credit card companies apply their highest interest to cash withdrawals. What’s more, this portion of your debt will be repaid only after any 0% balance transfers have been cleared, so the interest has more time to accrue.
- Your credit card is not a debit card - whenever you use your card, you increase your debt.
Click here to find money-saving credit card deals
Detox Step 3: Consolidate Debts
Personal and homeowner (secured) loans are another way to get your finances back on track. By consolidating several loans into one you can both simplify the payment process and save money.
Juggling a variety of debt payments each month could see less disciplined borrowers missing payment deadlines or going overdrawn – both of which could incur penalty charges from your bank or credit card. By consolidating loans, credit and store cards into one monthly payment you can remove this hassle. Furthermore, by searching the market to find a low interest deal, your new single repayment could be significantly less than your previous combined repayments.
Personal loans are unsecured (non-home owners can apply as they’re not secured against a property), they are available for lower amounts (typically £1,000 - £25,000) and are repaid over shorter terms (typically one - 10 years). Some loans also allow you to delay initial payments or take a payment holiday.*
As homeowner loans are secured against your home you could be able to borrow more than with a personal loan (typically £5,000 - £250,000)**. You may also benefit from a lower interest rate (sometimes equal to your mortgage rate), or be able to spread repayments over a longer period than a personal loan.***
Click here to find great deals on personal loans...
...Or here to find great deals on homeowner loans
Detox Step 4: Life Insurance
If your New Year’s resolution is to sort out family finances, you may want the added peace-of-mind of life insurance. Life cover can be sourced for as little as £5.63 a Month* and can help protect your family from the financial consequences should the unthinkable occur.
If you’re the main or joint breadwinner, life insurance will lessen your family’s financial burden in the event of your death by:
- Maintaining your family’s standard of living by replacing your lost income
- Settling your outstanding mortgage debt, credit cards and other loans
- Helping to pay for your children's education
- Paying final expenses, such as funeral costs
What does Life Insurance cost?
Here’s an example of typical premiums for 25 years Level Term Insurance (Level Term pays out a fixed cash sum should anything happen during the term of the policy):
| Sex |
Age Next Birthday |
Non-Smoker |
Amount of Cover |
Monthly Premium |
| Male |
25 |
Yes |
£100,000 |
£5.63* |
| Female |
30 |
Yes |
£200,000 |
£7.09* |
Even if you already have cover it’s still worth checking to see if you can find the same level of cover for less money.
Click here for life insurance deals
Detox Step 5: Switch Banks
In the bad old days, women used gravy browning for stockings, families huddled around the radio for entertainment, and customers remained with their banks forever. But that was the 90s, in the new millennium stockings are made from nylon, we now have TVs made from something called ‘plasma’, and bank loyalty is viewed by the smart money as a dodgy financial decision.
Fierce bank competition has seen the arrival of high-interest current accounts for those in the black and 12-month zero-interest overdrafts facilities for those who regularly dip into the red, with the very best deals typically available from online banks.
Yet despite these customer-friendly offerings, many people still maintain ‘old-school’ accounts with poor levels of interest and punitive overdraft rates. Indeed, the basic current accounts of the ‘big four’ – NatWest, Lloyds, Barclays & HSBC – still have interest rates of 0.1%.
Easy Switchover
But it’s not as if switching banks is difficult, gone are the days when customers had to manually transfer each direct debit and standing order. Today, banks must automatically transfer all such details to your new bank within three working days of notification of switchover. Also, it only takes about 10 minutes to fill out your new bank’s forms and set the wheels of change in motion.
Why Change Banks?
- Earn more interest - if you’re usually in credit and you have a 0.1% current account then what are you waiting for? The Alliance & Leicester Premier Direct account, for example, currently pays new customers 6.5% on the first £2,500.
- Free overdraft - if you’re regularly overdrawn then you could opt for a low interest overdraft account. Some banks now offer 0% overdrafts for the first year.
- Cash bonus for signup - several banks offer a cash bonus upon signup. First Direct is currently offering £100, though it’s only available to those earning over £24,000.
- Other perks - can include such things as free travel insurance, cashback on signup, and breakdown cover. Frequent flyers could opt for the Nationwide BS FlexAccount, which allows free cash withdrawal from ATMs worldwide.
- No account fee - your bank may be charging you an account fee (typically around £10 a month) but you could find the same level of service elsewhere for free.
If you are thinking of switching banks, be aware that some accounts come with hidden charges to offset the perks. But as long as you read the small print and balance the pros against the cons, there’s a huge potential for savings to be made.
Click here for find a great current account
Now that you’ve successfully completed our five-step debt detox programme, you’re ready to return to your normal life and start implementing a healthier financial regime. But remember, any relapses and we’ll have you back here for a hardcore refresher.
Happy savings!
