10 Ways to Beat the Credit Crunch
By Toby Hone
In the words of Paul Simon: “Times are hard!” So here are my top 10 tips for beating the credit crunch.
I’m not suggesting people make their own sandwiches, cut their own hair or walk to work. Instead the focus is on protecting your biggest asset – your home!
1. Understand your position. There is an old saying: “If you don’t know where you’re going, you’ll never get there’’. If you don’t know exactly how much your household expenses are, you won’t know where to focus. Once you have this information you can start actively reducing your biggest outgoings.
2. Mortgage mayhem. Mortgage interest is the biggest single cost for most households so it makes sense to target this expense. With inflation rising strongly interest rates are more likely to go up than down in the short term. You can protect against rate hikes by taking out a fixed-rate mortgage or even interest rate insurance.
3. Beware of mortgage arrangement fees . Mortgage arrangement fees have doubled in the past year. Although these can be added to your loan, they still have to be repaid and could add significantly to your overall mortgage costs. Arrangement fees can eat up your equity if you remortgage every couple of years. So don’t be fooled by mortgages with low interest rates and big arrangement fees.
4. Rent rather than sell. With house prices falling sharply it’s worth remembering that you only actually lose money if you sell. One option is to rent out your home and ride out the credit crunch. There has never been so much demand for rented accommodation in the UK. You may even end up with extra cash in your pocket if you downsize and rent or buy a smaller property yourself.
5. Use spare cash wisely. It’s usually better to pay off your mortgage than keep your money in a savings account. If you put £1,000 in a savings account and earn 5% interest you could be left with just 3% after the taxman has taken his slice. If instead you take that £1,000 and use it to reduce your mortgage you will save yourself, say, 6% interest. In other words, you save twice as much interest as you earn on identical sums of money! But make sure you can still get your hands on the money if you need it.
6. Improve your property. Instead of selling and buying a bigger home you may be better off improving you existing one. You’ll save on estate agent fees, legal fees and stamp duty. You may even be able to get extremely competitive quotes because many builders and other tradesmen are struggling to find work in the current climate.
7. Become a landlord. Consider renting out any spare rooms in your house. You can earn up to £4,250 per year tax free doing this. If you don’t like the thought of having complete strangers in your home, think about any friends or family you might like to live with.
8. Polish that credit score. Lenders are cherry picking customers more than ever. For this reason it’s essential to maintain a high credit score. Ways of doing this include: not missing any debt repayments, keeping loan applications to a minimum and, if you’re in danger of missing a loan payment, speaking to your lender!
9. Emergency measures. If you find yourself unable to cover short-term debt obligations, such as home loan repayments, there are still options available. In many instances you can qualify for payment holidays which can last up to 6 months and could help free up significant cash reserves. This is not a cheap option as missed payments increase future debt repayments, however it can help in emergencies. The measure of last resort will always be to maintain open and honest communication with your lender.
10. Find ways of making money. Believe it or not, there are still opportunities for homeowners and landlords to make money during the credit crunch. Whether this be improving their home or converting a large residential property into multiple residential units, there are still ways of adding value to property and in some cases making money in the current climate.
