Over the course of the past couple of years or so, the number of people looking for help and advice with regard to problems with their personal loans, credit cards and other debts has risen to an all time high, largely due to the effects of the credit crunch and recent recession in the UK.
As a result of this growing problem amongst many borrowers, the government has set up a new agency, specifically designed to offer suitable help and advice to those borrowers who are finding it difficult to maintain their loan and credit card repayments.
The new organisation is to be called the Consumer Financial Education Body (CFEB) and it will provide a free and impartial help and advice service to those people who are unable to manage their finances and loan debts, building up loan arrears and possibly worse.
The CFEB will take over responsibility for offering loan advice from the Financial Services Authority (FSA), who were previously charged with this task. However, with the growing number of people seeking advice with regard to their loans and other debts, the FSA were becoming inundated with requests for help and felt that they were unable to adequately focus on their main job of providing financial regulation to individual firms and loan companies.
Tony Hobman of the Consumer Financial Education Body said “People need access to the knowledge, confidence and support to take control of their money and choose products and services that meet their needs. The FSA has laid a tremendous foundation for financial capability and money guidance. I look forward to building on these achievements, taking the CFEB forward and helping many more people make the most of their money.”
The great advantage of having a flexible, tracker rate home owner loan or mortgage is that when the interest rate drops like it has done over the course of the past twelve months or so, it is possible to make overpayments on the loan and reduce the outstanding balance quicker than normal, thereby potentially saving thousands of pounds in interest payments over the term of the loan.
However, a new survey has found that around two thirds of all borrowers with this type of loan are not taking advantage of this whilst rates are particularly low, instead just choosing to make the reduced minimum repayment amount on their home owner loan.
The news comes from a new survey conducted by Unbiased.co.uk, who claim that the number of people overpaying on their home owner loan has actually reduced since May last year, with 63 per cent of borrowers failing to make overpayments currently, compared with 53 per cent at the same time last year.
The survey found that only 13 per cent of borrowers had left their loan repayment at the same level as it was prior to the sharp drop in the Bank base rate, although many people are using the savings made to repay more expensive debts on personal loans and credit cards.
Karen Barrett of Unbiased.co.uk said “It is worrying to see that instead of taking advantage of the historic low base rate, our research shows there is an increased trend of people failing to overpay on their monthly mortgage payments.”
“We are encouraged by the increasing numbers who are using their repayment savings to erode their more costly credit card and personal loan debts. However, those who are instead putting the extra into a savings account are missing out, as interest rates on savings also remain at a record low.”
Potential borrowers looking to take out a new home owner loan or mortgage are still opting for a variable or tracker rate loan rather than a fixed rate deal, according to the latest figures from mortgage broker, John Charcoal.
The figures show that during the month of March, 84 per cent of people who took a loan out with the company, chose a variable rate deal, the highest level since October 2008.
The figures also show that many borrowers are starting to switch their existing loan through a remortgage deal, as many banks and building societies are starting to increase their standard variable rates and new loan deals are offering higher loan to values than they were previously, thereby making a remortgage a far more attractive option for borrowers.
However, it would appear that rising house prices are once again starting to push first time buyers out of the housing and home owner loan market, due to affordability issues with being able to obtain the loan they require. Only seven per cent of new loans in March were for first time buyers.
The main reason for individuals opting for a variable rate loan, rather than a fixed rate, is largely due to the cost difference. Despite the fact that fixed rate loans are starting to get cheaper, there is still an average difference of around 2.5 per cent between a five year fixed rate and the equivalent variable rate loan deal.
Drew Wotherspoon of John Charcoal said “At first glance, the difference between variable and fixed rates is nothing short of monumental. Yet, when you look below the surface, with the large premium that borrowers have to pay for a fixed rate mortgage and the expected future movement of the bank rate, it is little surprise that variable mortgages dominate their fixed counterparts.”
Over the course of the past couple of years or so, many banks and building societies have been trying to encourage their existing borrowers to take their home owner loan to a new provider, in order to improve the status of their balance sheet during the credit crunch and economic downturn.
However, with interest rates on standard variable rate loans at an all time low in the last twelve months, there has been very little incentive for borrowers to even consider switching their current loan deal.
But now that a number of lenders are starting to increase their standard variable rates on existing loans again and more people are looking to move house at present, searching the market for the best possible deal they can get on a new home owner loan or mortgage, one lender has introduced a loyalty scheme to retain its existing loan customers when they move house.
Abbey have launched what they call their “Loyal mover” product range, which is designed to encourage existing borrowers to remain with the lender when they move house, rather than taking a new loan elsewhere.
The products include a two year tracker loan at 2.99 per cent and a two year fixed loan at a rate of 4.24 per cent. Both deals offer a maximum loan to value of 75 per cent and have no initial booking fees.
Furthermore, if a borrower is within six months of the end of their initial deal with Abbey, the lender will waive any early repayment charges if they use the new loan deals.
Adrian Whittaker of Abbey said “We are one of the only lenders to offer this range of products. We are keen to remind customers that loyalty can have its benefits when moving home. Our new proposition is based on the idea that homebuyers don’t have to move lenders to get the best mortgage deal.”
Just in case you weren’t aware, we are now in the final run up to the general election, due on May 6th! As the contest is particularly close on this occasion, this is having a detrimental effect of consumer confidence in the UK, due to the uncertainty of who will achieve power, or even if we end up with a hung Parliament.
Nationwide building society’s latest consumer survey has shown a significant drop in confidence levels from consumers in March, with many people reluctant to commit themselves to a new personal loan, or a home owner loan, until the situation becomes a little clearer in May.
The survey also found that a growing number of people are starting to cut back on their monthly expenditure, shopping around for the cheapest utility providers and looking for things such as cheaper car insurance.
Many individuals are also trying to repay as much of their personal loan and credit card debt as they possibly can, or in many cases, looking for a debt consolidation loan in order to reduce their monthly expenditure on loans.
Whoever wins the election, it is likely that the financial situation will be tougher for most people as the new government attempts to repair the UK economy, following the credit crunch and repaying debt or looking for a cheaper loan is likely to be a good move at present.
Martin Gahbauer, chief economist at the Nationwide said “With an election looming, more people will be unsure as to whether they will be better or worse off in the coming months and real concerns about the state of the economy and employment prospects could still be playing on the minds of consumers.”