Boost your finances by cutting your costs
By Corin Vestey     11th December 2007

Mounting mortgage costs could heap even more misery on homeowners in the New Year, so borrowers need to act now in order to cushion the impending financial blow.

Here’s how to devise a strategy to free up enough cash to cushion the blow. The best way to do it is to break it down into various stages; stripping any waste from the budget, paying off existing debt in the right order, maximising savings, and finally minimising mortgage costs when your current fixed term deal expires.

The rest of this article looks at each of these stages in detail. Please note that this is assuming your mortgage hasn’t already reverted to your lenders SVR. If this is the case, then switching to a new deal should undoubtedly be your first port of call as it’s where you’re haemorrhaging the most cash.

For example, the average lenders’ SVR is around 7.5%, putting your monthly repayments on a £200,000 home loan at £1,477. But switch to a two year fix with West Bromwich Building Society at 4.99% (fee £1,999) and your payments will drop to £1,168, over £300 cheaper per month.

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1: Cut the household expenses
Mortgage repayments generally make up around 30-35% of the average household’s take home pay. So while it may be the single largest outlay, you could still make significant savings made elsewhere on your budget.

Lose the dead weight: Start by taking a close look at your monthly bank statement; are you still paying for contracts that you no longer need or have simply forgotten about? Look for things like gym memberships, monthly DVD rentals – if you aren’t using it, scrap it.

Luxury or necessity?: Next up, take a look at those monthly outlays that you wouldn’t mind keeping but could do without. Broadband and satellite TV may be great to have, but they cost hundreds of pounds a year, and as luxuries they should be among the first things to go when it comes time to tighten the belt.

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Mobile madness: The average mobile user leaves 100 minutes and 73 texts unused every month, and collectively Brits waste £1.8 billion every year in the process. Give careful consideration to your usage habits before you sign up to a contract.

Ditch the wheels: According to RAC, the average car costs over £5,500 a year to own (including depreciation). Ditching your second car is really a no-brainer, as it should have a minimal impact on your lifestyle, but will massive improve your finances. For those willing to go completely car-free the savings will be greater still, but it will obviously come at the expense of convenience.

Switch energy provider: Thanks to the constantly rising cost of utilities, energy bills now constitute on of our largest monthly outlays. No one provider is cheaper across the UK, so you will have to shop around for cheaper energy bills to see which one offers the best deal in your area. Also, make sure you opt for an online tariff, as these work out almost £100 cheaper.

energy

Get cheaper insurance: Speaking of online savings, make sure you always purchase insurance policies from the insurer’s site rather than in branch, as they offer discounts of up to 50% for doing so. And finally, when a policy is about to expire, never, ever simply renew. Insurers don’t reward loyalty, so you will save yourself a bundle by shopping around for a new policy.

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2: Pay off debt cheaply
The quicker you can pay off any other debts you have, the easier it will be to meet rising mortgage payments.

Organise your debt: Arrange your debt in descending order and pay the maximum amount possible on the most expensive part (usually store credit cards) while meeting just the minimum payments on all other debt (obviously mortgage repayments should always be met first, as the repercussions of missing these will be far greater than any other debt).

Avoid interest altogether: You can significantly reduce your repayments by switching all credit card debt to a card offering a lengthy interest free period on balance transfers. Similarly, if you have upcoming expenditure, put it on a card offering an interest free period on new purchases.

Repay debt don’t save: Saving accounts will never earn more than 7% interest on your cash, but store credit cards charge interest at up to 30%. Don’t bother setting money aside until all non-mortgage debts are completely paid off, or you’ll be wasting money.

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3: Maximise those savings
Assuming you are in the enviable position of being completely debt free, you should put money aside on a monthly basis. This will help you in two ways – first it will get you in the habit of spending less than you earn, but will also help you pay for the new mortgage arrangement fee when your current deal expires.

These fees have increased rapidly in recent months, and can easily cost up to £2,000. Lenders will be only too happy to add this fee to your mortgage, but then you will be forced to pay interest on it until your loan is fully paid off, which can make it far more expensive, especially for those with small mortgages.

Here’s how to find the best saving account for you:
Always shop around: Nearly half of all Brits with savings accounts have no idea what rate of interest their money is earning.

There is a massive difference between the best and worst paying savings accounts. Never simply choose the first account you come across, and pay close attention to the rate when comparing accounts.

Lock away for higher earnings: If you are sure you won’t need to access your money, you can earn more interest with a fixed or notice saving account - the Anglo Irish Bank fixed rate bond offers a 6.75% rate. Be careful though; fixed accounts can charge as much as two months interest for accessing your money early.

Flexibility comes at a price: If you need access to your money, you will have to sacrifice some of that headline rate. Probably the best easy access account is ICICI’s Hi Save, which offers a 6.41% rate. There are others that pay slightly more, but they penalise you for making withdrawals, meaning they aren’t true instant access accounts.

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4 Minimise mortgage bills
When your current fixed term mortgage deal expires you should now be in a better financial position to deal with the inevitable hike in mortgage repayments. Your final step must be to find the best possible deal in the current market conditions.

Avoid that SVR: We mentioned it at the start but it’s worth reiterating; languishing on your lenders SVR is a terrible move that will cost you hundreds of pounds a month.

The right deal, part 1: The type of mortgage you choose depends very much on your outlook for the future. If you think lending costs are likely to soar, or simply want the security of set payments every month, then a fixed rate deal is for you.

If however you expect the base rate to fall further still, then you may want to consider a tracker mortgage instead. Just make sure you will still be able to afford it if rates suddenly head in the opposite direction.

The right deal, part 2: The mortgage you choose will also depend on how much you still owe on the house. For a large mortgage the headline rate is really all that matters, but the smaller the mortgage the more important the arrangement fee becomes.

Interest only option: If your mortgage bills are still too high to manage, you may want to consider switching all or part of your loan to interest only. This should only be seen as a short term solution - perhaps until mortgage prices fall again – as you are simply adding to your total mortgage cost. Similarly you could ask your lender for a payment holiday, but again this just offers short term gain for long term pain.

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Spend smarter, not smaller
There’s no getting around the fact that mortgage deals are getting more expensive, so the sooner you get planning for this the less of an impact it will have on your finances.

Reducing your monthly outlays shouldn’t require a drastic change to your lifestyle, as your aim is to cut out waste expenditure rather than the necessities. You could be amazed at how much you can save with just a little effort.

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Article produced by EveryInvestor.co.uk