The first shoots of economic recovery are beginning to sprout, but the economy will not be healed quickly. We are still many years away with a rocky road ahead to navigate before the economy is healthy again.
We are going to have to be a just as careful in the future as we are being now in relation to budgets and cash flow. Going crazy with credit is what started this mess, thinking the economy has bounced and it is ok now would be the worst thing to do.
Tearing up the personal finances and starting all over again could be the best thing to do; you can examine certain outgoing closely and really ask do you need them. Identifying them is one thing, but deciding which to keep and which to scrap can be a real tough decision.
Targeting habits, good as well as bad is the first way to make decent sized cutbacks. Alcohol cigarettes, regular trips to Starbucks will all soon see the wallet bulging again by cutting down or stopping completely. Entertainment or pampering would be next, so say goodbye to the gym and hello to the roads, the beauty salon is out as well. The only danger here is weak willpower, so make yourself 110% committed, the savings you see after a week or two should help bolster that willpower.
What should never be overlooked or forgotten about are interest rates, with the base rate at historic lows, homeowners have been able to make lower payments. Yet paradoxically, many people have decided to over pay on their monthly mortgage, so why is this?
Many of the brand name high street financial institutions have upped the overpayment threshold from what was the standard 10%, to 20% over the last year or so. Anything over these percentages causes penalty charges to be issued, so the lenders it seems have taken the unusual step of promoting mortgage over payments.
Two financial institutions stand out from the crowd however are Britannia and the Co-Op, who are offering a whopping 50% overpayment before penalty charges on mortgages. You don’t need to be a genius at maths to figure out at 50% or 20% overpaying monthly can slash years off a mortgage and thousands in interest. But with interest rates set for a steep increase in 2011, the window is fast closing.
The Bank of England’s base rate has remained at 0.5% since March 2009, but inflation has been rising and is now at worrying levels, therefore resulting in interest rates are going to rise very soon. This is going to put pressure on homeowners with tracker mortgages as rising mortgage repayments are coming down the hill, so making overpayments now is strongly recommended.
Despite what popular opinion has said, you cannot use overpayments as back up payments if you ever miss a payment, once paid it cannot be withdrawn or altered to cover other costs. Very, very few lenders offer this service, but those that do will allow withdrawals of the overpayment, at a heavy cost through penalty charges though.
While overpayments should be encouraged as a good thing, don’t go crazy and end up raiding you savings and emergency fund to take advantage. If you receive a windfall like a bonus or inheritance it makes sense to use this unexpected income to help pay off a mortgage quicker. Experts always urge caution and moderation, excess towards wither end of the spectrum ends in financial difficulties, but you never know what could happen next in this roller coaster of an economy.
Howard writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.