Monthly Archives: December 2014

How to Save with an Offset Mortgage

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fb - how to save with an offset morgageBuying a home is generally one of life’s most significant events, even for those who have been through the process before. This being so, getting the right mortgage can have a major impact on the family finance.

What Kinds of Mortgage Are Available?

With a repayment mortgage, the monthly payment covers both the capital sum borrowed and the interest due on it. At the end of the term, the mortgage is guaranteed to be paid off in full, providing all the payments have been made on time.

With an interest-only mortgage, the monthly payment is simply to cover the interest owed. At the end of the term the borrower needs to pay off the capital sum borrowed in full.

With an offset mortgage, the borrower essentially has access to a giant overdraft, which is available for a fixed term. The balance must be paid off by the end of the agreed term..

What Are the Main Benefits of an Offset Mortgage?

The benefit of offset mortgages is that the savings made by reducing the interest due on the capital sum borrowed will be greater than the interest earned on money held in a standard current account or instant-access savings account.

Interest income is liable to tax, and the amount of tax due (if any) will, of course, depend on an individual’s circumstances. For working-age adults however, there could be significant savings to be made by foregoing taxable interest income in favour of reduced interest charges.

Offset mortgages offer a higher degree of flexibility than either repayment or interest-only mortgages. Borrowers on regular incomes can calculate how much they need to set aside each month to have their mortgage paid off by the end of the agreed term and stick to that. Borrowers with more variable incomes can increase and decrease their payments in line with their earnings. Likewise borrowers can dip into their savings, if they find they need or want to. Hence overpayments can be made with confidence, since the money can be withdrawn if necessary rather than being locked away.

How Is Interest Calculated with Offset Mortgages?

In terms of interest, offset mortgages typically work in the same way as repayment and interest-only mortgages. They may be fixed-rate, which means that the interest rate is set for a specified period. They may also be tracker mortgages, in which the rate charged to borrowers goes up and down in tandem with changes in the interest rates set by the Bank of England.

Are There Any Disadvantages to Offset Mortgages?

Not so much a disadvantage, more as an observation, is that offset mortgages can be harder to find than either repayment or interest-only mortgages. Borrowers may therefore have to look a bit longer before finding one. Borrowers may also find it more challenging to move from one provider to the other in search of better deals (e.g. new fixed-rate deals). While it is quite possible that the availability of offset mortgages will increase as people become more aware of them, this cannot be guaranteed.

Likewise, some people may prefer the security and imposed discipline of repayment mortgages, even if they may not be the best deal from a strictly financial perspective. The flexibility of offset mortgages may lead to temptation or alternatively to individuals being overly worried about spending money which has been put into their mortgage fund. Getting some advice from a financial adviser can help to resolve these issues and give you the best chance of finding the right mortgage for you.

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Getting the best life insurance policy

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Screen Shot 2014-12-11 at 16.49.51When thinking of the family finances and your personal wealth, savings and investing may be at the top of your agenda. For some people however, life insurance can be a crucial part of taking care of dependents and loved ones in the event of their (untimely) death. With this in mind, it can be helpful to understand what options are available and how they can apply in the real world.

Option 1 – Term or Whole Life?

A whole-life policy, as its name implies, is valid for the whole of your life. In other words, it is guaranteed to pay out at some point, providing you maintain the premiums. A term policy will pay out if you die within a certain period of time – the “term” of the policy. Term policies can be useful to cover a present need, which you assume will be resolved at a set point in the future. For example, it could cover the period of a mortgage or the period until minor children become adults.

Option 2 – Level, Increasing or Decreasing Benefit?

The next question is whether you want the level of cover to stay the same over the term of the policy (level term), whether the level of cover should go up of the policy (increasing term), or whether the level of cover should go down of the policy (decreasing term).

Your choice is likely to be influenced by the purpose of the policy. For example if the insurance is purely to cover a repayment mortgage, then a decreasing-term policy could offer the best value for money. The need for insurance cover will reduce as the outstanding mortgage is reduced and therefore there may be nothing to be gained from having extra cover. If, on the other hand, the policy needs to provide for young children in the event of the death of a parent then an increasing-term policy could be used to ensure that any benefit keeps pace with inflation.

Option 3 – Lump Sum or Family Income?

A lump-sum pay-out can help with the immediate financial aftermath of bereavement. For example it can take care of funeral expenses or pay off a mortgage. On the other hand, suddenly coming into a large sum of money can bring its own problems. There is no shortage of real-life stories about lottery winners who have wound up in poverty due to having mismanaged their wealth. Some people may find that suddenly having responsibility for managing a child’s inheritance creates more stress during an already difficult period. They may prefer the security of knowing they will have a regular monthly (Family) income to replace the deceased’s financial contribution.

Key Question – What Level of Cover Is Required?

Having too much cover might cost money which could be used elsewhere. Having too little cover could pose serious difficulties for your loved ones in the event of your death. That said, if you are on a tight budget, then having even some cover may well be better than having none at all. Again, the ideal level of cover will depend on your individual circumstances.

Planning for the Future

As the old adage goes “Hope for the best, prepare for the worst”. A financial plan should cover both the best case scenario (a long and happy retirement) and the worst case scenario (an untimely death). Because of this, it can be hugely helpful to get some advice from a financial adviser. This is particularly true for people who need to ensure that young children will be provided for in the event of the death of one or both parents. Even those without children, however, need to think of their own plans for the future, and how they are going to finance them.

 

How to Bag Christmas Bargains

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fb - Christmas BargainsChristmas comes but once a year and for all the fun it brings it can be a significant drain on the family finance. With that in mind, it’s worth looking at opportunities to see where savings can be made. While it may still be too early to put up the decorations, some of the best Christmas bargains require a bit of advance planning.

Food and Drink

Think about having a non-traditional Christmas. Christmas dinner does not have to mean turkey (or any other kind of bird) and all the trimmings followed by Christmas pudding. Going vegetarian or opting for cheaper forms of meat can cut the costs without compromising on taste. Likewise, dessert can be anything you fancy rather than something which is specifically made for Christmas.

Actively compare the cost of making food at home as opposed to buying it ready made. Neither is necessarily cheaper or better. Be prepared to consider the budget/own-label brands. You may be pleasantly surprised.

Get in plenty of “soft” drinks. Keep expensive wine and spirits for particularly special times. For the rest of the time serve soft drinks either on their own or with a dash of alcohol (e.g. in a punch). This can help to make the expensive alcoholic drinks go much further.

Entertainment and Travel

If at all possible, book Christmas entertainment and travel well in advance. It can also help to be flexible when looking at your options. For example, whilst air and rail can be both quick, the bus can be substantially cheaper. Likewise smaller, more local entertainment venues can also put on very good shows, which can be substantially more affordable than their larger-scale counterparts. It can also be worth looking at whether signing up to a loyalty programme can cut costs even further. Similarly cultural venues may have a “friends of” programme with discounts.

Cards and Gifts

This is arguably one of the trickiest areas of Christmas. The key to managing it is setting expectations. This starts with setting a realistic budget, which means one that you can comfortably afford. Your budget is a limit not a target and if there is a conflict with it and your plans for card and gift giving, then you should change your plans, not your budget. Make a list of all the people to whom you want to give cards and/or gifts at Christmas. The key word here is want. If you routinely send gifts to people just because you know they’re going to send one to you, then put those names on another list. Contact these people well before Christmas to make them tactfully aware that you’re only planning to send a card this year. They may be relieved.

Your next challenge is to make your money go as far as possible. Ways to achieve this include: watching the internet carefully for special deals and flash sales; buying second-hand and creating home-made gifts. These can not only be welcome gifts in their own right, but help to keep the pennies for when they are really needed. Adults and older children could even be given IOUs for items which are likely to come down in price in January.

Avoiding New Year Financial Headaches

Keeping control of spending at Christmas can help you avoid a nasty money hangover at New Year. Why not go one step further and a make a resolution to review your personal wealth this coming year by investing some time getting advice from a financial adviser?