Loans Articles

The credit crunch has been with us in the UK for over a year now and, even though a lot of people tried to deny that it existed and was just a term invented by the media.

Whilst other individuals claim that they have not been affected by the slow down in the economy, a large percentage of individuals and families are now starting to feel the full impact of the crunch, even if they haven’t done so previously, particularly those people who have debts through mortgages, personal loans and credit card balances.

It is not only individuals who are suffering however, many businesses are going through particularly tough times at the moment, leading to increased fears over job security. We have all seen the devastating effects on a large number of the high street banks and other financial services companies, such as loan companies, but the current economic slow down is now having a knock on effect on many businesses in other sectors as well, as many people are starting to cut back on their expenditure.

So if you’re one of the many people who are feeling the pinch and perhaps struggling to keep up with the monthly mortgage and loan repayments, or seeing you credit card balances increasing at an unhealthy rate, or maybe you’re just worried about job security and the possibility of unemployment in an uncertain future, what can you do to avoid falling victim to the credit crunch, or at least limit the damage done to your own personal financial situation, before we see the light at the end of the tunnel.

Budget Planner

The first stage in sorting out your financial situation and creating a bit of stability is to organise a budget planner by carrying out an income versus expenditure exercise.

Firstly, write down your total take home pay and other income from things such as any state benefits for which you are eligible, plus any overtime or bonuses (although you should be careful when including overtime or bonuses as these tend to be the first things to get cut by employers when times start to get tough).

You should then list all your regular expenses, including luxuries and non-essential items, not just bills. Be honest with the list, if you leave things off you are only lying to yourself and the exercise will not be effective. It’s also important to write down each expense so that you can see exactly where all your money is going.

Cut Down On Unnecessary Expenses

Once you have completed your budget planner and have a full breakdown of your income versus expenditure, it may become immediately obvious where it is possible to make monthly savings.

Sadly, it is normally the luxuries in life which are the first things which must be cut back on, such as going out for an evening, gym membership and even (dare I say it?) cutting down on smoking and drinking. Other savings can be made by perhaps changing where you shop for food and planning meals before you go to the supermarket and only buying what you actually need once you get there.

This can make a big difference to the cost of the weekly shopping trip. Another idea is to leave the car at home for short journeys and walk instead, saving on petrol costs and getting you fit at the same time!

Build Up An Emergency Fund

It is important to have an emergency fund of money which you are able to fall back on in the event of difficult times, such as redundancy, sickness or unemployment.

Ideally the amount of this fund should be in the region of at least three times your committed monthly expenditure (the things every month which you have to pay, such as personal loans, mortgage and utility bills) to help you get through until you get back on your financial feet. A larger sum is or course better, but even a small amount of money put to one side can make a difference to the situation and reduce the potential of increased levels of debt.

Maintain All Protection Plans

One area of your monthly expenditure which you should definitely not cut back on is the regular payments made on any type of protection plan, or insurance policy you may have. This could include payment protection policies, income protection, or life and critical illness cover.

At times when money is tight, these are often the first things to be cancelled, but they were all taken out for a reason, usually this is to protect your family and mortgage or loan repayments in the event of anything untoward happening to you and it is vital to maintain these contracts in order to keep the benefits and peace of mind which they offer, particularly in an uncertain world where unemployment is increasing and high levels of debt can lead to health problems.

If you do not have any such policies in place, you should contact an independent financial adviser who can offer suitable advice on the cover and type of products you need. Even if you already have some policies in place, it is worth while reviewing exactly what benefits and level of cover these offer, to make sure they are still adequate to meet your requirements.

Maintain All Loan Repayments

It is essential to keep up to date with all the repayments on your personal loans, mortgage and credit cards bills, as this will keep your credit score at a higher level.

Falling behind with loan repayments, or even making them a few days late of the due date, can have dire consequences for your future ability to be accepted for any type of credit or loan, as each missed or late payment will leave a mark on your credit record, reducing your overall score.

In addition to this, late payments and arrears on loans and cards usually incur a penalty charge and in some cases, additional interest. In the worst case scenario, getting into arrears on your mortgage, or a secured loan, can eventually lead to your home being repossessed and even with unsecured loans and other debts, a build up of arrears and missed payments can lead to County Court Judgements (CCJ’s) and stop you from obtaining future credit.
Clear Credit Card Balances And Overdrafts

Credit cards are, in most cases, undoubtedly one of the most expensive forms of credit available, along with bank overdraft facilities.

Both of these methods of borrowing charge one of the highest rates of interest around and even when times are good, these should be the first things to be paid off, but in the current economic climate this is even more important.

It may be all very well to say just pay off your credit card debts, we all know that it’s not that easy, if it was, nobody would have any debts at all and you wouldn’t be reading this article! But there are options to get rid of credit card balances.

Ideally you should concentrate on paying more than the minimum required monthly repayments, in order to clear the balance quicker and save further interest. Other options available would be to transfer your credit card balance to a new card which offers zero per cent interest for a certain period, allowing you to clear the debt over a period of time without paying exorbitant levels of interest.

If this is unavailable to you, another option could be through a debt consolidation loan. Although this option would still charge interest, the amount charged is likely to be considerably less than that of a credit card. Check the rate payable both on the loan and your card to ensure this is the right thing to do, before you sign up.

Debt Consolidation Loan / Remortgage

If you are in a situation, as many people are, where you have several different loans and credit card balances with a number of providers, all paying reasonably high levels of interest, it may be possible to cut your monthly expenditure by bringing all your various debts together with just one provider by taking out a debt consolidation loan.

This option could work out significantly cheaper and also much easier to manage every month, as the interest rate charged is likely to be less than that of the debts being repaid, particularly if you opt for a secured loan and you will only have to make one payment each month.

As an alternative to a debt consolidation loan, you could opt to re-mortgage your home to consolidate your various loans and cards that way. If you have early redemption penalties which would be applied to your existing mortgage, this may not be a realistic option, however your existing lender may be able to offer a further advance on your existing loan.

You should take care with either of these options however, as by consolidating existing debts, in many cases you will also be extending the term of any existing commitments and although the monthly repayments may be considerably lower on the new loan, these will be made for a longer period, with interest also being charged for longer and you could actually end up paying significantly more over the long term than you would have done on your original debts.

Still In Difficulty?

If you are still struggling to keep up with the repayments on loans, mortgages and cards and are worried about falling into an arrears situation, you should always contact the provider in the first instance. 

A lender will look favourably on someone who approaches them when financial problems first arise and will take a sympathetic view to your problem, offering help and a solution wherever possible.

The worst course of action is to bury your head in the sand and hope the problems will go away, this is the most likely route to having a CCJ issued against you, or even the possibility of repossession.

Help on financial matters can also be obtained from places such as the Citizens Advice Bureau and debt counselling services. Before taking out any new plans or loans, it could well be beneficial to seek professional advice from an independent financial adviser (IFA), who is able to select products and offer advice across the whole of the market.

Finally, you should think very carefully before committing to any particular one course of action, as it is often difficult to undo something once you have started. Weigh up all the pro’s and cons of the various options and make sure that the one you take is the best possible route to meet your own personal needs and requirements.

There is a curse………may you live in interesting times! For those individuals involved in the finance industry at the present time, particularly in the loan and mortgage sectors, we are certainly experiencing interesting times. Whether you are a borrower or a lender, the loan and mortgage market is a tough place following the credit crunch and the effect it has had on the economy as a whole.

Banks, building societies and other lenders, who only twelve months ago were happy to grant a loan to almost anyone, are now being particularly selective about who they are prepared to accept as new customers. Even the slightest blemish on a persons credit file can make a difference as to whether or not they are accepted for a loan, mortgage or credit card and also affect the interest rate they are likely to be charged for it. This is why it is vitally important to ensure that you keep your credit record as clean as possible, as it can make a huge difference to your future financial situation.

Those individuals with a clean record will achieve a high credit score and as such are able to enjoy a wide choice of cheap loans, mortgages and credit cards, which offer good terms at competitive rates of interest. However, for those less fortunate individuals who may be currently experiencing financial difficulties, or have done so in the past (even if they are now up to date again), the choice when it comes to bad credit loans is far more restrictive and a lot more expensive than a mainstream lender. The level of a person’s bad credit can have a huge impact on their ability to obtain a loan and whereas in the past a lender may have disregarded a very minor problem with an applicants financial history, nowadays, due to a severe tightening of lending criteria, a lender will take everything into account when approving a potential new customer and someone with a low credit score may be refused a loan altogether.

It is not only an individual’s financial history of things such as county court judgements, arrears and defaults which affects their credit score, but also things such as how they keep up to date with the payments on their regular monthly bills. If someone is a few days late in making their credit card payment on a regular basis, for example, this will have an effect on his or her overall credit score. Likewise someone who has a large number of credit agreements through existing loans and credit cards is likely to have a lower credit rating, even if all the payments are completely up to date, although having some existing form of credit such as a loan or mortgage is usually beneficial to a person’s credit rating, as it shows a track record of regular payments and proves that the individual can manage his or her money in a responsible manner. Also, each time a person has a credit check made on themselves, not necessarily for a loan application, but possibly for other items such as a new mobile phone contract for example, this leaves a “footprint” on that person’s credit file, which can reduce their rating also.

When a credit check is carried out on a person, it is usually through one of the three main credit reference agencies in the UK, which are Experian, Equifax and Call credit. It is possible, for a nominal fee, to obtain a copy of your credit file from each of these companies and their contact details and website addresses are available elsewhere on this web site. It is a good idea to check your credit file on a reasonably regular basis as often one or more of the agencies may hold false or inaccurate information regarding your personal details, which once again can affect your ability to be accepted for a loan or other credit. The company in question can alter any incorrect information, but you need to draw their attention to it. A regular check on your credit file will also show up whether anybody else is fraudulently using your details to obtain credit for him or herself through a cloned credit card perhaps, or even worse, stealing your identity to take out new loans etc. This type of criminal activity is on the increase and keeping an eye on your credit file is good way of monitoring the situation.

For someone who already has a poor credit rating and wants to improve the situation, then the most important thing is to keep on top of the problem. Firstly, the individual in question should obtain a copy of their credit file in order to ascertain the full extent of the damage; many people with bad credit have little or no idea as to what their exact financial situation is, particularly when it comes to things like arrears and county court judgements. All these will be listed on the credit file. The next thing to do is to clear up any arrears on finance agreements as soon as possible and also to repay any outstanding county court judgements.

Once a county court judgement has been cleared, the individual should obtain a certificate of satisfaction from the court responsible for bringing the case against them and a copy of this should be forwarded to each of the credit reference agencies as proof of payment. They will then be able to update their records and remove the offending item from the person’s file. It is then vitally important to maintain the regular payments on all credit arrangements to improve your overall credit rating, one missed payment can put someone right back to square one. At the same time it is important not to apply for any further credit through additional loans or cards, as this will lower the overall credit score.

It is not possible to repair a person’s credit file overnight, it is a long slow process which often requires financial sacrifices in other areas and a great amount of self discipline, but by sticking to this procedure, regular checks on an individual’s credit file will start to show a steady increase in that person’s score and eventually lead to a clean bill of health as far as their finances are concerned.

The financial news at the moment is full of nothing other than the continued slowdown in the UK economy and the potential consequences for all of us, particularly those of us who have a mortgage on their home, or any other form of secured or even unsecured debt.

There has been a particular focus on the housing and mortgage markets recently and where this is heading. With house prices remaining, at best, flat and likely to reduce depending on the type of property and where it is situated, consumer confidence is at an all time low with regards to purchasing property. Coupled with this, the banking and lending sector are in the middle of their own financial crisis and due to the fact that the rate at which the banks borrow from each other, LIBOR (London Inter Bank Offered Rate), remains much higher than the Bank of England Base Rate, there seems to be very little available money in the wholesale market to lend to individuals, with the result that many of the major lenders are withdrawing mortgage products and tightening their lending criteria on a daily basis.

These factors inevitably lead to concerns over what will happen to those individuals who currently have a mortgage on their property and in particular, those borrowers who are either struggling with their monthly repayments or are about to come to the end of a cheap fixed rate deal. It is estimated that 1.4m borrowers will be in this situation throughout the course of 2008, with the prospect of increases in their payments of up to 60% and the possibility that they will not be able to obtain a more competitive deal elsewhere.

All these factors have led to concerns that there is likely to be an upsurge in the number of properties falling into arrears, leading to people’s homes being repossessed. During the course of 2007 we saw a huge increase in the number of repossessions taking place and this seems set to continue throughout 2008, with the level of repossessions already up by 16% for the first quarter of the year compared to the same period for last year.

It’s all very well talking about repossessions and the effect on the markets, but what about the individuals concerned, those unfortunate people who may be facing losing their home? What can they expect to happen, how does the process work and what, if anything, can they do to try and avoid the consequences of becoming homeless?

The whole rocky road to repossession starts with arrears on the mortgage, or secured loan. Once a single payment has been missed on a home loan the account is deemed to be in arrears. At this point the lender in question will write to the borrower informing them of the situation, the level of arrears and enquire as to how they intend to remedy the problem. If the borrower responds to the lender at this stage, often the problem can be rectified, with the borrower either making a payment to bring the account up to date, or with an agreement being reached with the lender to clear the arrears over a period of time.

If, however, the mortgage or loan account falls into two or more months arrears, then the lender has the right, under the terms and condition of the loan, to instigate legal proceedings for repossession of the property against the borrower.

The first time the borrower is likely to know about this stage is when they receive a letter from the lender’s Solicitor. This letter will normally state the level of arrears currently outstanding on the loan and that payment of these should be made within the next seven days, or the individual should contact the lender in order to arrange a mutually agreeable method of repaying the arrears. If the borrower fails to respond to this request within a reasonable timescale, then the lender is likely to initiate court proceedings to recover their losses.

The lender will apply to the County Court who will issue a summons to the borrower, which will state the name of the lender bringing the case, the amount in question and will give details of the date, time and location of the hearing. Usually the hearing will be held in the County Court which is most convenient for the defendant (i.e. the borrower). The date set for the hearing is normally between four and eight weeks from the onset of a claim, although this can vary depending on the area and the workload of the court. During this period both parties must provide to the court, a copy of all the documents on which they intend to rely to support their case. Each side must also provide copies of the same to each other prior to the hearing. If any documents are missing from those submitted prior to the hearing, they may be dismissed by the court if presented on the day. If, during the course of the waiting period, the arrears are cleared, or an agreement is reached between lender and borrower, then the hearing will be cancelled.

Once the case comes to court, the Judge will hear evidence firstly from the lender (as the person bringing the claim) as to reasons why a possession order should be granted, then secondly from the borrower who is defending the claim. After hearing all the evidence, the Judge will make his decision, which could be either to adjourn the case if further information is required or a decision can not be made, dismiss the case (usually this would only be if the lender had acted unfairly, or breached conditions of the loan), make a suspended possession order which allows the borrower to remain in their home as long as certain conditions are maintained (such as keeping up with repayments to the lender as set by the court), allow the borrower additional time to sell the property in order to avoid repossession, or to make an outright possession order. In all but the last scenario, the borrower will remain in their home, providing that certain conditions are met. If a full possession order is granted, then the borrower must vacate the property, or the Bailiffs will be instructed.

Repossession is always considered to be a last resort, both from the lenders and courts perspective; it is not usually in anyone’s interest to make an individual and his family homeless. The lender does not want the situation of having to sell a property, which they have taken into possession, at a greatly reduced price and incurring costs along the way and the borrower certainly does not want the prospect of being kicked out into the street and losing his home.

There are many reasons why an individual could find themselves in arrears with their home loan; often this is due to a change in personal circumstances such as an accident, long term illness or redundancy. In these circumstances there are a large number of insurance policies which are readily available in the market place to cover exactly this situation and such a policy should be considered by a borrower to be part and parcel of their mortgage, or loan, costs. Hopefully, a plan of this type will never be needed, but to dismiss these contracts is false economy. In many cases, however, arrears simply accumulate on the loan account through an individual’s bad financial management. These are often the cases where the borrower is often ashamed or embarrassed by the situation and tends to bury his head in the sand and hope that the problem will simply go away. Trust me…it won’t! There have been cases where a couple have had a joint mortgage on their home, but where the husband (for example…sorry fellas!) is responsible for paying the household bills and his wife goes to answer the door one day, thinking maybe it’s the Postman with a parcel, only to find the Bailiffs standing on the doorstep holding a possession order!

If you are having difficulties paying your mortgage or other loan, don’t allow any of the above scenarios to become your own story. In the first instance you should always contact your lender and let them know about the problem. They are required to take a sympathetic view of your circumstances and will help you in every way they are able to. There are also other organisations and professionals who are able to offer help and advice with arrears, such as the citizen’s advice bureau, debt councillors and financial advisers to name a few. Finally, remember that nobody really benefits from a repossession and it should always be considered as a last resort, but if you are having financial difficulties and do not take action to remedy the situation, it could happen to you!

If you’re one of the millions of people in the UK who have a mortgage on their home, or have some other type of loan secured against their property, then you’re probably a little concerned about the current economic dilemma which is gripping the UK lending market. Either that or you’re one of the many people who are completely sick and tired of hearing about the “Credit Crunch” and the state of the British economy every time you open a Newspaper or switch on the evening news on the television. If you fall into the latter category (and you’ve still managed to read this far!) I apologise for going on about it even more, but it’s probably worth taking an overview of the situation and look at the possible implications for borrowing, both now and in the future.

The current problems faced by many of the high street banks and other lending institutions have in fact been brewing for some time and many observers of the financial markets have predicted a slowdown in the economy and possibly even a recession and claim that this is now actually long overdue. The economy has actually been gradually slowing down over the past few years, but has been propped up by an increasing housing market which has grown dramatically over the same period to an excessive level. We, as a nation have been encouraged to borrow our way out of any potential recession, using the increased levels of equity within our homes and other properties to secure loans and other credit commitments which we perhaps would not have taken on if our homes had not been growing in value so well. Lenders have also taken a very relaxed view with regard to lending criteria over recent years, with high income multiples being used to calculate maximum loans (multiples of up to ten times salary have not been unknown), high loan to value ratios (in some cases up to 125% loan to value) and relaxed underwriting of loans and mortgages with things such as self certification of income, where an individual has not been required to provide any proof of income to a lender before acquiring a loan and also sub prime lending, where those individuals with a poor credit history through defaults on their payments and county court judgements, have still been able to obtain finance.

This irresponsible lending by the banks and other major financial institutions has finally caught up with them, although those individuals who borrowed all the money in the first place are not entirely blameless. Many individuals borrowed at a far higher level than they could realistically afford in the long term, often on a low, fixed rate of interest for a short initial period such as two or three years. Now many of these loans and mortgages are reaching the end of their fixed rate period and the interest charged is about to increase dramatically, in many cases to an unaffordable level. As lenders have been forced to withdraw products and restrict lending criteria to a sensible level, (where, realistically they should have always remained) many borrowers whose fixed rate deals on their mortgages and other secured loans are about to end are likely to find themselves unable to meet the monthly repayments and also unable to remortgage or restructure their loans. Recent figures released by the Council of Mortgage Lenders indicate that approximately 1.4 million people in the UK will be coming to the end of a cheap, fixed rate deal this year and many of these will be facing increased payments of anything between 30 and 60 percent. This will inevitably lead to increased levels of arrears and repossessions, which will hit many lenders who are already struggling, very hard indeed.

Many lenders have severely restricted their lending criteria by reducing income multiples to more manageable levels and reducing the maximum loan to value ratio they offer, in some cases, to as low as 75%, whilst increasing the interest rates they charge, particularly on the sub-prime sector of the market. Even these restrictions have not been sufficient for some lenders, and many lending companies, particularly those who have been largely exposed to the sub-prime sector, have been forced to withdraw from new lending business altogether, whilst others have had to downsize dramatically, making large numbers of their staff redundant. Although the Bank of England base rate is steadily reducing, the rate at which financial institutions borrow from each other, LIBOR (London Inter Bank Offered Rate), remains particularly high, which means that lenders are unable to borrow funds on the wholesale money market in order to fund their own products. Just last week, the Royal Bank of Scotland became the first high street bank to launch a rights issue in order to raise approximately £10m from its share holders to rebuild their capital reserves. This was closely followed by the Halifax Bank of Scotland group and doubtless there will be many more lenders who will be forced to follow this trend.

So is it all doom and gloom? Are we about to face a crash in the property market similar to the one in the early nineties? Is the economy on a downward spiral to recession, or is there light at the end of the tunnel? The media are always quick to pounce on bad news, often exacerbating the situation. The Bank of England has announced a plan to relieve some of the pressure on lenders and try to improve the liquidity of the banking sector and raise the level of confidence in the financial markets by allowing lenders to swap mortgage backed securities for £50bn of Treasury bills.  Although this will only go part way to alleviate the funding problem, it will hopefully help to restore confidence within lending organisations, even though any losses they have made on loans will remain the responsibility of the banks themselves.

As for the housing market, it seems unlikely that we will be faced with the same situation that many of us still remember from the early nineties, when house prices plummeted leaving many homeowners with negative equity in their homes and paying interest rates on their mortgages of up to 15%, which led to hundreds of repossessions. Although the latest figures from the Halifax and Nationwide both show a fall in house prices of 1% over the past twelve months, this reduction is lower than many predicted and speculation as to the short term (i.e. next twelve to eighteen months) future of property prices is divided, with some saying that there will be a reduction of at least 10% over the next year, whilst others state that demand is still greater than supply for housing and therefore prices will remain high. Interest rates are significantly lower than the early nineties, with the Bank of England base rate currently 5% and likely to reduce further over the next twelve months, which means that the cost of borrowing money on a mortgage or loan is comparatively cheap. Gross lending on mortgages for March 2008 was £26.3bn according to the Council of mortgage Lenders, which was an increase of 5% over February 2008, but down by 17% from £31.7bn at the same time last year. This could be caused by people not being able to obtain funding for their mortgage, or more likely being cautious and waiting to see what happens with prices in the next few months. Either way, a slight reduction in house prices could be a good thing for the housing market and coupled with low interest rates, could be just enough to encourage individuals to enter the property market once more. Yes, there have been casualties as a result of the Credit Crunch and it is likely that there will be more before we come out of the other side, but one thing’s for sure, it’s going to be an interesting year!

Everybody has heard the term ISA, particularly around the tax year end, but many people are understandably confused about what they actually are, how they work and how much can be invested. The aim of this article is to hopefully clarify some of the grey areas concerned with ISA’s and help to create a better understanding of what is, in actual fact, a relatively simple savings idea.

Individual Savings Accounts, or ISA’s were introduced in 1999 by the Government to try to encourage those people who did not have any savings to start putting some money to one side for themselves for the future in a tax efficient manner. They were introduced to replace PEP’s (Personal Equity Plans) and TESSA’s (Tax Exempt Special Savings Plan), which had been the previously available tax efficient savings vehicles introduced by the Conservative Government of the time.  

The main benefit of an ISA is that any savings invested within the ISA wrapper will grow free from UK tax (although any distribution units received from a stocks and shares based ISA will be taxed at source at a rate of 20%). Because of these tax benefits, there is a limit to the level of investment, which can placed within an ISA. For the current (2008/2009) tax year the overall limit is £7200 per person, per year, with a maximum of £3600 in cash. This has been increased from the previous limit of £7000 per person, with a maximum of £3000 in cash.

The other main alteration to the rules of ISA’s which has been brought into effect from April 2008 has been the abolition of Maxi and Mini ISA’s. In previous years, an individual could invest up to £7000 into an equity based Maxi ISA, or up to £4000 in stocks and shares within a Mini ISA as well as up to an additional £3000 in a cash ISA. The distinction between Maxi and Mini ISA’s has caused considerable confusion for many individuals over the years, who were unsure of how exactly the rules were applied and how much they could invest in each particular type of investment. From April 2008 this has now been simplified to a straightforward choice between cash ISA’s and stocks and shares based ISA’s. similarly, all the previous tax efficient savings and investment plans, namely PEP’s, will now also be classed as stocks and shares (equity) ISA’s.

As we have mentioned previously, it is now possible to invest a maximum of £7200 in an ISA. This whole amount may be invested in a stocks and shares, or equity ISA, but only £3600 may be invested in a cash ISA. Every one pound invested within a cash ISA reduces the overall allowable limit payable into an equity based ISA by one pound also. For example, if an individual were to invest £2000 into a cash ISA, the maximum amount they could also invest into a stocks and shares ISA within the same tax year would be £5200. However, if a person were to invest £2000 into a stocks and shares ISA, they would still only be able to invest £3600 into a cash based ISA. The cash ISA and stocks and shares ISA for the same tax year may be invested with separate providers, although it is not possible to have two providers for a cash ISA or a stocks and shares ISA within the same tax year.

To qualify to be able to invest into an ISA, an individual must be over the age of eighteen, resident in the UK and eligible to pay UK tax (whether or not they actually pay any tax). The allowances are available each tax year, so therefore it is possible for someone to invest £7200 on 1st April and another £7200 on 6th April (although the overall maximum amount is subject to change each year).

It is also possible to transfer ISA’s from one provider to another. If an individual has ISA’s (or PEP’s) from previous tax years, and they are unhappy with the performance, or risk level of their investment, or maybe they would just like to consolidate their investments within one provider, then it is possible to switch between providers. The application for a transfer should be made to the new provider, who will arrange for the funds to be re-allocated. The funds will remain eligible for tax purposes for the original year that they were invested, which means that the investor will not have used up his or her ISA allowance for the current year. It is important that the transfer is made directly between the new and old provider, if the cash value is withdrawn from an ISA, then the eligibility for that year is lost and the money will be classed as a new investment for the current year. Another change from April 2008 is that it is now also possible to transfer funds from cash ISA’s from previous years directly into a stocks and shares ISA, although it should be remembered that these are two very different types of investment with entirely different risk strategies.

So what is the difference between cash ISA’s and stocks and shares ISA’s? Many people think that an ISA is a specific type of investment in its own right. This is not strictly true. The term ISA is simply a name for a tax wrapper which encompasses an underlying investment. As we have already discussed, this investment may be in cash or stocks and shares.

A cash ISA is very simply a deposit based savings account, usually via a bank or building society. It may be accessible with a pass book (in the same way as a normal savings account would operate) or via the postal system, or Internet. Some cash ISA’s are instant access, but to achieve a more competitive rate of interest, notice may be required before withdrawing funds. As with any other deposit based savings account, interest is added to the original capital invested on a regular basis. The advantage of an ISA over other such savings accounts is that all the interest added is free of tax, regardless of the individual’s personal tax status. As it is invested in cash on a deposit basis, a cash ISA is considered to be a minimal risk investment, however due to the safety element, overall long term returns can be quite low compared with the more adventurous stocks and shares ISA.  

As the name suggests, a stocks and shares, or equity based ISA is an investment made on the stock market and as such carries a higher risk element to it than a cash ISA would, although the level of risk can vary greatly depending on the specific type of investment chosen. Rather than investing directly into stocks and shares within an individual company, an equity based ISA invests in a range of companies, often from different sectors of the stock market, by using a fund which is overseen by a fund manager who is responsible for selecting the individual stocks within the portfolio and managing the same on a daily basis. The type of underlying fund which is commonly used for stocks and shares ISA investments is known as a Unit Trust.

A unit trust is an investment in which the individual investor’s money is “pooled “with that of other investors to buy stocks and shares. It invests in a range of securities, and so spreads the risk for those investing within the fund. The method of investing in a unit trust is by purchasing units, the price of which is calculated by the Manager each day. The price equals the value of the underlying assets within the unit trust at the time of purchase, divided by the number of existing units (this is the equivalent of buying shares directly within a specific company). Each unit trust has a specific aim and the Manager must invest in appropriate investments to meet the aim.

The investor receives units in exchange for the capital invested. The Manager can use this capital to purchase new assets. Over time, the Manager buys and sells securities, aiming to secure for the unit holders within his fund the maximum return in the form of income and/or capital growth. By investing capital in a range of securities through a unit trust, it is possible to participate in a wide spread of investments regardless of the size of your investment.

Although there is no minimum or maximum term to any ISA investment, they should be considered as medium to long term investments, particularly in the case of stocks and shares ISA’s, with a minimum investment term of at least five years, but preferably longer. There are also usually charges involved with investing in a stocks and shares ISA. These could include an initial charge, a bid to offer spread on the purchase and sale of units and an annual management charge.

As can be seen from the above description, a stocks and shares ISA is a far more complicated investment than a cash ISA and there is a vast range of funds to choose from, all of which have different investment strategies, asset classes and risk profiles. Unless you are an experienced investor it is almost impossible to select the appropriate fund for your particular needs and attitude to risk and it is therefore recommended that before investing in such a fund you seek advice from an independent financial adviser who has access to the whole of the market and is able top recommend appropriate funds which are suitable to your individual circumstances. A list of authorised advisers is available from the Financial Services Authority website, www.fsa.gov.uk.

There are many kinds of mortgage deal available to borrowers in the UK today, from the traditional standard variable rate loan, to flexible and offset mortgages, tracker deals, capped and collared rates and of course discounted and fixed rates. In recent years there has been an increasing popularity in the latter deals, namely discounted and fixed rate mortgages. Before we discuss why these products are so popular, let’s look firstly at what is meant by a discounted rate or a fixed rate.

A discounted rate mortgage is one where the variable interest rate charged by the lender is subjected to a discount for an initial period of the loan. As the interest rate changes, the monthly payments on this type of loan will also change accordingly. The discounted term is usually for one or two years, but it is possible to obtain a discount for longer periods. Often these are stepped discount products where the discount available reduces through the initial period. For example, an 18 month discounted rate mortgage may offer 3% discount in the first six months, followed by 2% discount for the next six months and 1% discount for the final six months. Normally, the shorter the term of the discount is, the larger the reduction will be, although most deals tend to work out at about the same monetary value over time, for example, a discount of 2% for one year will provide the same saving as a 1% discount for two years. Once the discounted rate ends, the mortgage reverts to the lender’s standard variable rate.

With a fixed rate mortgage, the interest rate charged by the lender is fixed at the outset for an initial period of the loan. As with discounted rates, this initial term is usually for two or three years, although it is possible to obtain longer fixed rate deals, sometimes up to ten years. The main benefit of a fixed rate loan is that the monthly repayments will remain constant throughout the fixed period, regardless of fluctuations in the base interest rate. Of course, this can be either an advantage or disadvantage, depending on how interest rates change. If rates were to rise during the fixed period, then the borrower will be better off than they would have been on a variable rate mortgage, however if rates were to reduce, then they would be paying above the odds for the same loan. With most fixed and discounted mortgage deals the borrower is tied in with the lender for the duration of the initial period and therefore would not be able to get out of the mortgage in the above scenario without incurring a large redemption penalty. Once the fixed rate period of the loan ends, the interest rate reverts to the lender’s standard variable rate.

There are several good reasons to take out a discounted or fixed rate mortgage. If a borrower were to buy a house in need of refurbishment, for example, a reduction on their mortgage repayments could be of great benefit, allowing them extra available money to spend on the property in the early years. Also, many individuals enjoy the security of knowing that their repayments will not increase for a time. However, fixed and discounted rate mortgages are often taken out for the wrong reasons. Many individuals when buying, or re-mortgaging their homes, over commit themselves with a large mortgage and are only able to afford the monthly payments if they choose a low fixed rate, or discounted mortgage for an initial period, giving little, or no thought as to how they will manage to meet the monthly repayments once their current deal ends. This has particularly been the case in recent years as house prices have increased disproportionately to people’s salaries and wages. This coupled with the fact that mortgage lenders have taken a relaxed attitude to lending criteria, allowing high income multiples and self certification, has led to many individuals committed to mortgages of five or even six times their salaries, which they would be unable to afford without obtaining an unrealistically cheap rate.

The attitude taken by many borrowers in the past has been to re-mortgage their homes every two or three years, once the current deal ends and take out another short term offer. This philosophy has been backed up by many mortgage advisers and brokers, although their motives are different from those of the borrower as they will receive a commission payment every time they re-mortgage their clients. It is a popular misconception to believe that it is best to re-mortgage your home every few years in order to chase the cheapest deals. Usually the cost of a re-mortgage, i.e. valuation fees, administration or booking fees, possible redemption penalties on the old mortgage, solicitors fees etc., cancel out any benefit that had been received from the previous deal. Also, as the overall mortgage term reduces and the re-mortgages are taken over shorter terms, this has the effect of increasing the repayments each month and the temptation is often to extend the original term of the loan in order to reduce the cost to an affordable amount. Clearly, this is an expensive exercise and the borrower is not moving forward with their loan at all. The other assumption which everyone makes is that there will always be cheap deals available and that they will be able to re-mortgage at the end of their fixed or discounted period. This leads us on to the problem which is now facing many borrowers and the time bomb which has been ticking for the past couple of years and seems to be about to explode!

The impact of the global credit crunch, which we have heard so much about in the press recently, is starting to take its toll on mortgage lenders and property prices alike. Lenders are finding it increasingly difficult to borrow funds from Banks, building societies and other financial institutions in the current economic climate, as well as many suffering losses from their exposure to the sub prime lending market. This has had the effect of forcing a large number of lenders to restrict their product range, or in some cases, withdrawing from new lending altogether. At the same time, house prices have started to fall, with predictions that they are likely to reduce further over the next twelve months.

All this creates a huge problem for those individuals who took out, or were sold, a fixed or discounted rate mortgage two or three years ago which is now coming to the end of the initial term. Many of the deals which were available two years ago are no longer there, particularly those offering high income multiples and high loan to value ratios. This is a double whammy for the borrower as firstly, they may not be able to borrow the amount of loan required based on their income and secondly, if the value of their home has reduced, they may not have enough equity within the property to achieve the loan to value required by the lender. Many borrowers in this situation may be faced with the prospect of not being able to re-mortgage at all, particularly if they are unfortunate enough to have a less than perfect credit rating. This could leave the borrower facing a huge increase in their mortgage rate, in some cases up to two or three percent. In monetary terms, an increase of 3% on an interest only mortgage of £150,000 would mean an increase in the monthly repayment of £375. For many individuals in this situation, such an increase would be totally unaffordable, yet thousands of borrowers are faced with this prospect during the course of the next twelve months. There is little wonder then that a large number of financial experts are predicting a record number of repossessions and bankruptcies over the course of the year.

So what can you do to avoid the bailiffs if you are one of the many thousands of people whose fixed or discounted rate mortgage deal finishes this year? Despite everything we have discussed so far in this article, there are still plenty of mortgage providers out there in the market place offering good deals, although these may not be as attractive as your current interest rate and could vary greatly depending on your personal circumstances and credit rating, but a re-mortgage is still a viable option in many cases and should be seriously considered. Alternatively, it is also worth approaching your existing lender to see what they can offer. Many mortgage lenders will offer a new deal to existing customers whose current rate has expired in order to retain their business. If you find yourself in financial difficulty and struggling to keep up with your repayments and are unable to obtain a re-mortgage, then you should once again contact your existing lender before arrears start to accumulate. Under the mortgage code of conduct, they are required to take a sympathetic view of your situation and may be able to offer advice and assistance. This could include extending the term of the loan, switching to an interest only payment, or reducing the interest rate charged for a period of time. There are still those individuals who over committed themselves in the past and are simply living beyond their means. No one likes to admit to this, but if this is the case then the only option may be to sell the property and downsize to something more affordable.

A mortgage is a long term commitment, rather than a string of short term deals and as such you should ensure before you buy that it is realistically affordable, not only in the early years, but also once the initial fixed or discounted rate period has finished, because as we are now seeing, there may not be the opportunity to re-mortgage in the future. As with any financial commitment, it is worth seeking independent financial advice from a qualified expert in the field, who will be able to advise you on your affordability and the long term costs involved with a mortgage.

We seem to be a nation of homeowners here in the UK today, with a higher percentage of us owning our property than most of our European counterparts, whether it is owned outright or subject to a mortgage or other secured loan. House prices have grown dramatically over the past few years and although this has been great news for existing homeowners, those first time buyers who are trying to get their feet on the first rung of the property ladder have found it increasingly difficult to be able to afford that first purchase. Many have had to borrow funds from parents for additional deposit, or have family members act as guarantors for the mortgage payments in order to obtain the necessary level of funding. Many young people who would normally be buying their first house in their early twenties are now renting for longer periods and not entering the housing market until they are in their thirties. This also applies to existing homeowners who may be looking to make the next move to a larger home. The gap in price between where they currently are and where they would like to be has widened to such a degree as to make the move unaffordable. Despite these facts, many people have been led by their desire to live in their dream home rather than by common sense and have taken out high income stretch mortgages beyond their realistic affordability.

The huge increases in house prices, coupled with the Bank of England interest  base rate steadily increasing up to a level of 5.75% in 2007, has led to a significant slowdown in the housing market. Fewer people are buying and many individuals who have purchased property in the past two to three years, whether they are first time buyers or movers, are finding it increasingly difficult to maintain their mortgage repayments, particularly where they opted for a low fixed rate mortgage which has now come to the end of the fixed rate period. Many have seen their mortgage payments soar as deals end and they are suddenly forced into paying the standard variable rates offered by their lenders, which can often be two or three percent higher than the previously fixed rate.

As the impact of the recent Credit Crunch continues to adversely affect both the housing market and mortgage lenders alike, the financial regulator, The Financial Services Authority (FSA), has issued a stark warning that over a million homeowners will find it difficult to meet the repayments on their mortgages through the course of 2008, with many of these falling into arrears, or even defaulting on their loans. There is of particular concern for approximately 1.4 million borrowers whose fixed rate mortgage deals will end this year. If they do not take action, the average mortgage repayment is likely to increase by £210 per month.

Another blow to the housing market came from the Land Registry at the end of January when they announced that house prices fell again in December 2007, a statistic which has been backed up by figures from the Halifax and Nationwide Building Societies who have both recorded a decrease in the cost of property over three consecutive months.

With high interest rates and falling house values, many borrowers who are currently struggling to keep up with their mortgages are faced with the dilemma of not only being unable to afford to meet the monthly repayments, but also not being able to sell their homes and downsizing due to being placed in a negative equity situation. This was the same scenario faced by many borrowers in the early to mid nineties, when interest rates were running at around 15% and the housing market collapsed, causing many people to lose their homes. It is perhaps little surprise then that the Council of Mortgage Lenders made a prediction this week that repossessions were likely to increase by fifty percent in 2008, with around 450,000 homes being repossessed during the course of the year.

So what should you do if you happen to be one of the unfortunate individuals who find’s themselves in this situation, having difficulty paying the mortgage and maybe even, already having some arrears on your account? First of all, to quote the Hitch-hiker’s guide to the galaxy, “DON’T PANIC!”, help is at hand. You should contact your mortgage lender as soon as the problems start. Under the Mortgage Code of Conduct, they are obliged to view your financial problems sympathetically and will always try to help you remedy the situation in a mutually beneficial manner. This could include: offering a reduced interest rate for a period, offering a new mortgage deal, capitalising any arrears within the existing mortgage, extending the term of the loan to reduce the repayments, or switching the mortgage loan to an interest only basis for a period of time. It is not in your mortgage lender’s interests to allow your loan to go into a default situation and they will only ever repossess a property as a last resort. Another option could be to look at a re-mortgage, although depending on the level of arrears, this may not be a realistic option as many lenders are being forced to tighten their lending criteria and may not be able to offer a viable alternative. The worst thing you can do is nothing. Many people, when faced with financial difficulty, feel ashamed or embarrassed and tend to bury their heads in the sand, not opening their post or replying to correspondence, hoping that the problem will go away! This is the worst possible course of action, as you will find out when the Bailiffs are knocking at your door!

The outlook for the housing market seems full of doom and gloom then! What with the full impact of the Credit Crunch leading to job insecurity, lenders withdrawing from the mortgage market (or at least, severely restricting lending criteria), house prices falling and a huge increase in the number of repossessions as borrowers either can’t afford their mortgage payments, or surrender their properties back to the lender voluntarily in order to escape the negative equity, why on earth would anyone want to buy a house in the present economic climate? Furthermore, should those of us who already own our homes sell up quickly and get out of the housing market before the value of our existing home plummets?

The simple answer is, of course, no. Property will always offer a good long term investment, with the key words in that statement being “long term”. Yes, the housing market has slowed down significantly in recent months and the evidence suggests that it could slow yet further, but are we on the brink of a complete collapse of the housing market in the same way that many of us remember from the early to mid nineties? Experts in the property market predict that there is likely to be a fall in house prices in the UK of around five percent throughout the course of 2008. This is, of course, an average figure, some properties in certain areas are likely to be hit harder than this, whilst other houses may actually rise in value, depending on the desirability of the property and the location. The Bank of England are also expected to reduce interest rates through the year. We have already seen one rate reduction in December 2007 and many predict that the base rate will have fallen by one percent, to 4.5% by the end of 2008. With house prices generally lower and interest rates reduced, the housing market should become more affordable and attractive to both movers and first time buyers. This will restore confidence in the market and the prediction is that we will see a steady increase in property values from the start of 2009. So what we are experiencing currently is a dip in the housing market, but with a more optimistic outlook in the not too distant future. The advice to those who already own property, therefore, is to stick with it for the next twelve months and you are likely to see your mortgage payments reduce and the value of your property start to increase once more.

But what about those people who are looking to buy a house this year, should they wait until the market picks up, or buy now whilst confidence is low? There are certainly many bargains to be had at the present time. Houses are not selling at the moment, which means a vendor may accept an offer well below the asking price, rather than have their property left on the market for a long period of time. The other option for buyers is to look for repossessions. If the predictions are correct, then there should be a large number of properties available through this route during the course of the year. Once a lender has repossessed a property, they will want to re-sell it as soon as possible in order to recoup their losses. This will mean properties for sale at prices well below the market value. Those individuals with a conscience may be concerned that by taking this route they are cashing in on someone else’s misfortune. This may be true, but if you don’t buy it, someone else will!

We all like to enjoy the nice things in life, all those luxury items that perhaps we don’t really need, but want anyway! It always feels good to drive around in a new car, get home and relax in front of the most up to date television and home theatre system whilst reclining in the comfort of your brand new three piece suite. Although we all like to own these and other such items, they can often be rather expensive and with factors such as high mortgage interest rates, increased worries about job security and a general economic slowdown, many of us are reluctant to be parted from our hard earned cash!

The retail sector is feeling the effect of this slowdown. Many shops and outlets are reporting poor sales figures, partly due to the factors already mentioned, but also due to an increasing number of retailers all competing for the same customers, coupled with additional pressure from online stores and internet sites undercutting high street prices. In order to remain in business, retailers are having to offer incentives to potential customers to try to stop them going round the corner to buy the exact same item cheaper from their competitors. One method which is regularly used to close the deal is to offer zero percent finance, or interest free credit.  

Interest free loans and credit agreements can be a particularly attractive option to someone purchasing an expensive item as it means that they are able to pay for it over a longer period, or defer payment to a later date, without incurring any additional costs. Even if an individual has the necessary funds available in savings to make the purchase, It can be beneficial to take out a zero percent loan, as they would still receive interest on their savings for the duration of the loan term.

Interest free credit can take various forms, but the most common options are either a loan agreement where monthly repayments are made to repay the debt over a pre-agreed term, or “buy now pay later” deals where no repayment is made, but the whole amount falls due as a single payment after a certain term. Interest free credit is usually offered over a relatively short period such as one or two years, but it is possible to obtain deals which run over longer periods, sometimes up to four years. This is normally down to how keen the retailer is to sell his product, or how much competition he is facing.

Although interest free loans appear to be a highly attractive option to anyone, there are still areas for concern that an individual must be aware of prior to applying. With any arrangement of this nature, the funding is provided through a loan and as such the finance will be through a loan agreement. The applicant will be subject to a credit score to check his or her credit rating. This will leave a “footprint” on the individual’s credit file, which can have an adverse effect on their overall credit score. Because of the benefits offered by interest free credit, lenders are only likely to approve a loan to those applicants with a high credit score. Someone who has a poor credit rating, or who has had financial problems in the past, would most likely be declined for this type of loan deal.

Another factor to be aware of is that although the interest free term of the loan may be only for two years, for example, very often the overall loan term is for a longer period and if monthly repayments are being made, the regular payment which is initially set up by the lender can often be based on repaying the loan over this longer term and it is up to the borrower to arrange to make additional payments. If the interest free term is exceeded without full repayment being made, interest is then charged on the outstanding balance of the loan. The penalty for exceeding the interest free period can be large, with annual percentage rates (APR) of interest often in the region of thirty percent. In some instances this interest is charged retrospectively, being back dated to the original start date of the loan, which can add a large lump sum on to the outstanding loan balance in addition to ongoing interest charges. In this situation, any benefits of an interest free loan would have been completely cancelled out and the borrower would probably have been better off with a normal loan at a reasonable rate of interest. The same applies to “buy now pay later” deals, although the penalty for non repayment by the due date can be even more severe, as no repayments have been made at all and therefore the outstanding balance has not been reduced from the original amount borrowed.

So what are the options for someone who already has some form of interest free credit which they will be unable to repay before the due date? If an individual does not have the funds available to make the repayment, it could be possible to refinance the loan through a bank or other finance company. Although interest would be charged on this new loan, it would be likely that this would be at a lower rate than that charged by the original loan company. It would also be possible to avoid any penalties such as back dated interest charges being added, provided that the new loan completed prior to the due date of the interest free credit.

Although this course of action could save a borrower a great deal of money, clearly the best option is to ensure that adequate repayments are made on any interest free credit arrangement, or funds are made available by the due date to clear the full outstanding balance of the loan. If you are considering entering into a deal of this type and are unsure as to whether or not you will be able to repay the debt by the due date, you should really ask yourself the question “do I really need to make this purchase?” If the answer is still yes, you should, as with any other type of loan, check the details of the loan agreement and ensure that you fully understand the implications of what you are entering into.

There is a growing problem in the UK today which is facing many individuals who are approaching retirement age, that is having sufficient income to maintain their standard of living through their retirement years. There are several reasons why this could be the case:

People are generally living longer these days, due to advances in medical science and more healthy lifestyles. This, on the face of it, is surely a good thing. However, longevity can bring financial problems. Money invested in savings and pension schemes has to last for a longer period, meaning that income has to be spread more thinly. This also creates a problem for the Government in providing state benefits. As people are living longer, we are rapidly approaching a situation where there are more individuals drawing money from the state than there are paying into it.

The next problem is that of pensions. With recent changes in pension legislation and many companies withdrawing from offering schemes, or reducing the benefits available through them, coupled with poor investment returns over recent years, many individuals are receiving far less from their pension schemes than they had anticipated. These factors, coupled with bad publicity for pensions, such as the pensions mis-selling of the late eighties and early nineties and the “Mirror group” pension scandal, have disillusioned many individuals into not topping up existing pensions, or even not making any pension provision at all. This can only compound the problem in the future.

Many individuals own their own homes outright by the time they reach retirement, usually having repaid any mortgages or loans secured on it long ago. With the recent growth in house prices, this has made many people very wealthy indeed, with an asset often worth hundreds of thousands of pounds. Yet, for the reasons discussed above, they could well be short of retirement income. This “asset rich, cash poor” situation is becoming quite common and for those people who don’t want to sell their home or downsize to a smaller property, releasing the equity in their home through a lifetime mortgage, could be an ideal solution to the problem. 

“Lifetime Mortgage” is a generic term which is used to describe a whole range of products which allow homeowners to release equity from their properties, either through some form of secured loan, or through selling part of the home (reversion scheme). These products are designed in such a way that they are open-ended and no capital repayments are made to the lender during the term of the loan. The outstanding balance of the loan is usually repaid from the estate of the borrower upon death, or in the case of joint borrowers, on second death. This has the effect of providing the necessary funding for retirement, often without the burden of monthly loan repayments, thus offering peace of mind to the recipient.

Lifetime mortgages are considered to be a fairly new concept. The first plan, however, was introduced in the 1960’s. They generally fall into two broad categories: firstly, schemes which allow clients to borrow against the equity in their home, with the debt being repaid on death and secondly, schemes which allow a client to sell a proportion of their home to a finance provider whilst continuing to live in the property rent free until death. During the late eighties and early nineties, several schemes were introduced which were linked to investment bonds and interest roll-up plans, many of these causing more problems than solutions for the individual taking them out. These products created a bad reputation for lifetime mortgages and many individuals were put off following this course of action.

A conscious effort was made in the early nineties to try to restore confidence in the lifetime mortgage market. This included legislation being introduced to prohibit certain types of plan, a range of new products being introduced which offered better choice and protection for potential borrowers and a number of the larger financial institutions entering into the market. Probably the main thing to restore confidence in loans of this type was the introduction of the “Safe Home Income Plans” (SHIP) organisation in 1991.

The safe home income plans organisation was created by a group of lifetime mortgage providers to introduce a code of practice for those providing such products, which included more clarity and certain guarantees and protection for those purchasing them. Many providers are now members of SHIP and s such, must subscribe to the following code of conduct:

1. The members of SHIP agree to provide fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations must be clearly set out in their literature, including all costs which the applicant has to bear in setting up the scheme, the position on moving, the tax situation and the effect of changes in house prices.

2. The client’s legal work will always be performed by a solicitor of their choice. In all cases, prior to completion of the plan the solicitor will be provided with full details of the benefits the client will receive. The solicitor will be required to sign a certificate to the effect that the scheme has been explained to the client.

3. The SHIP certificate will clearly state the main cost to the householders assets and estate e.g. how the loan amount will change or whether all or part of the property is being sold.

4. All SHIP plans carry a “no negative equity” guarantee i.e. you will never owe more than the value of your home.

All of the major providers of lifetime mortgage products now subscribe to the SHIP code of conduct and anyone who is considering taking out such a plan should ensure that they use a SHIP provider because of the clarity and protection this provides. The SHIP logo will be clearly displayed on any literature provided by a lender who subscribes to the code.

There is a wide range of lifetime mortgage products available on the market today and we will look at these shortly. Although there are many different individual plans, there are several features which are common to most lifetime mortgages: most are only available above a certain age. This is usually 60, although some lenders will consider lower ages. At these lower ages to total loan to value ratio is usually quite low (commonly 20-25%). This amount increases as the age increases, due to reduced life expectancy. These plans will also take a first legal charge over the property in much the same way as a conventional mortgage would. They are all designed to release capital, whether this is in the form of a lump sum or regular income and most are open-ended. This means that no repayment of capital is due on the plan until either the borrower dies, the property is sold, or the borrower goes into long term care or sheltered accommodation. Most are set up as interest only loans, whether or not any monthly interest payments are made and most schemes are now regulated by the Financial Services Authority (FSA) as regulated mortgage contracts, with more regulation to be introduced in the near future to cover home reversion schemes.

The main types of lifetime mortgage plans are as follows:

Income plans: These are products which are designed to release cash which is then invested to provide a regular income for the borrower. The most common type of investment would be an annuity, which can provide an income for life, with or without a return of capital balance on death.

Cash plans: These products release equity in the same way as above. However, the lump sum generated is given directly to the borrower to invest in any way they see fit. This type of scheme could be used to repay outstanding debts, for example, or to fund home improvements. The use of the funds released is at the discretion of the borrower.

Open ended interest-only mortgages: with this type of scheme a regular monthly payment is made by the borrower to the lender, which is equivalent to the amount of interest charged on the loan for the month. Although there is the requirement to make regular payments on these products, there are a couple of advantages over other schemes. Firstly, as the interest is being paid off each month, the balance of the loan does not increase over the years. Secondly, it is usually possible to borrow a higher loan to value ratio (particularly at younger ages) than other types of scheme, due to the fact that the loan balance will not increase.

Interest roll-up schemes: In this case no monthly payment is made to the lender. Interest is rolled-up on the loan so that the outstanding balance increases as time passes. This can have a significant effect on the total mortgage balance over a number of years, particularly when the plan is taken out at a relatively young age. For example, if interest is rolled up on a scheme for a period of ten years, the outstanding balance could be more than double the original amount borrowed. For this reason loan to value ratios are usually lower at younger ages (e.g. 20-25% at age 60), increasing as the age of the borrower increases, due to shorter life expectancy and therefore less time for the interest to be rolled up.

Drawdown mortgages: These work in much the same way as the roll-up mortgage schemes. The main difference with this type of plan is that the total lump sum available is released in stages, rather than as a single lump sum. This could be in the form of a monthly payment or other periodic interval. The benefit to this type of plan is that interest is only charged once the funds have been released and therefore interest does not roll-up on the scheme as quickly as one where the lump sum has been released as a single payment, particularly in the early years of he plan. 

Shared appreciation mortgages: In this case no monthly payments are made to the lender and no interest is charged on the loan balance. Instead of charging interest, the lender would take a percentage of the growth in value of the property (e.g. 30%) between the inception date of the loan and the point where the loan is repaid (i.e. on death of the borrower). For example, if the value of the house increased by £100,000 between the start date of the loan and the death of the borrower, using a shared appreciation rate of 30%, the lender would receive £30,000 plus the original sum advanced.

Reversion schemes: These schemes differ from those listed above due to the fact that they are not mortgages. With this type of scheme, the funds are raised by the homeowner selling part, or all, of their property to the provider, who then releases a percentage of the value purchased to the homeowner. A legal contract is drawn up allowing the homeowner to remain in the property, rent free, either until the property is sold, the owner goes into long term care or sheltered accommodation, or the owner dies. At this point the property is sold and the provider receives the equity share originally sold to them. How much money is actually made by the provider on this type of scheme is dependant on the increase in property values rather than on interest rates.

There are other factors which a potential borrower should be aware of prior to entering into a lifetime mortgage. Taking out such a product can significantly reduce the value of an individual’s estate on death, particularly where interest has been rolled-up on a scheme. If a potential borrower wishes to leave a legacy to family or loved ones, they should consider their options carefully. It is a good idea to consult any potential beneficiaries, making them aware of the implications, before entering into such a plan. Any extra income or lump sum derived from a lifetime mortgage may also have a detrimental effect on means tested state benefits (such as income support) and also Government housing grants, which may be available to an individual. Extra income could also reduce an individual’s age allowance for income tax, meaning that a borrower could end up paying more tax as a result of entering into a lifetime mortgage.

This article has been intended as a brief introduction and overview to lifetime mortgages. As we have seen, there are many different types of scheme and products, each of which provide different benefits. Before entering into such a scheme, you should fully understand the different types of plan and also what, exactly, you want from it. This can be a very complicated area of financial planning and extremely expensive if you get it wrong and it is therefore vitally important that you seek independent financial advice from a suitably qualified adviser, who will be able to guide you and your family through the various benefits and pitfalls of lifetime mortgages.