Life rarely pans out the way we expect, things happen and plans change. Even if things do happen the way you want them to, you can’t always time them to fit around your life.
When anything significant happens in your life which will have an affect on your finances, you need to review your position to see if you can cope with the changes. Whether it is your income going down, your expenses going up, or both, you must make sure you plan ahead. If you have already been living close to your financial limit, it can be difficult to make enough cut backs. In these situations people often start to cancel insurance policies which they shouldn’t be doing, reduce their standard of living below that which they are comfortable with, or get themselves into a downwards spiralling trend of debt.
One of the biggest changes that can affect a household is the arrival of a new baby. Expenses go up, and unless the mother has a good maternity leave package, income can fall dramatically. This is an example of something that can be part of your life’s plan, but cannot be timed as you would like it. For some people, there is a way to utilise the flexibility of mortgages in order to allow them to manage their finances better in this type of situation.
Say there is a couple who are in their 20s or 30s and are planning for a baby, they have a £100,000 mortgage with 15 years remaining and pay £720 per month. When they come out of their tied-in period and are looking for a better deal, they could have the option of extending the term of the mortgage to up to 35 years with some lenders, making their contractual mortgage payments around £420 per month. Because you are able to make overpayments on most mortgages of upto 10% of the annual balance, as soon as the mortgage starts, they could then speak with the lender and increase their payments to £720 as it would have been before. This way, if they ever need to reduce their income, they can just stop over-paying at any time and effectively reduce their outgoings by £300 per month.
This isn’t for everybody and you need to decide beforehand if you have the financial discipline so as not to abuse this technique. If you can manage your money well, save money each month and keep your bank balance well in the black, then this could be a good option for you. If you spend to your limit each month, live in your overdraft, or look back each month and regret how much money you have squandered on things you didn’t need, then maybe this isn’t for you. It might be that you never end up making that call to put your payments back up to what they should have been, and instead just increase your spending.
If you do set up your mortgage in this way, there are a few lenders who would make this idea even better. Rather than your ‘overpayments’ of £300 per month simply reducing your mortgage balance, they put it into an account which offsets your mortgage balance. This means that you are still in affect reducing the amount of money on which you are being charged interest, but you have the option of borrowing that money back without further application at any time you like. Again, using this right takes financial discipline so that you don’t borrow the money back unless you really need to.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
22nd July 2013
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