There are only three ways to combat the cost of living crisis; earn more money, have fewer and lower outgoings, or combine both. For many people, earning more isn’t an option because they’re either already working the maximum hours they can, and many bosses aren’t going to want to give out pay rises if we’re about to hit a recession. So the second option of reducing costs is, for most people, their only option. But, of course, for many, this will be impossible if they’re already shopping at the cheapest shops, have already cancelled their various subscriptions, if they had any in the first place, and have tightened their belt until they’ve run out of holes to move along to. I don’t have an answer for those people, and for the thousands of people renting, I don’t know what you should do for the best.
Many people are out of options, and without government intervention, which seems scant at the moment, people need to know what’s what and how that can affect them.
For people that own their own homes, there may be a few things you can do, and whilst this does not constitute advice, it may give you pause for thought about your next move. First, though let’s spell out what is going on.
The UK is about to enter into a recession longer than the recession that followed the 2008 global financial crisis, and real household incomes are going to be squeezed on an unprecedented scale. With further energy price cap rises in October and now January, taking the average cost of gas and electricity to over £3500 per year, many people will be in danger of being unable to pay their bills. This will almost certainly push many further into debt and result in a wave of defaults and CCJs, especially as the social media movement dontpay.uk is advocating that on October 1st, a mass cancellation of direct debit mandates to energy suppliers takes place. They aim to force energy companies to reduce bills, reducing the effect of the cost of living crisis.
The first thing to mention about cancelling energy bills and trying to give suppliers a bloody nose with mass action is this; it will affect your credit rating. But, of course, some people perhaps won’t care, and if it’s a choice of buying food or paying a gas bill, you buy the food because suppliers won’t cut you off. For those who can make payments but want to take a stand, please be aware of the damage it will cause to your credit history and its implications. Both gas, electric and water companies report to credit reference agencies. As soon as you stop paying your bills, they’ll report to all three credit reference agencies, Experian Equifax and Transunion you have missed a payment. This gets marked as a ‘status 1’, which means you’ve missed one payment. This will escalate each month with a status 2, 3, 4, 5 and 6. Each time you add a number, your credit history is further impacted, your credit score will reduce, and you’ll become less creditworthy overall. After status 6, the real problems will happen because once you’ve hit status 6, the next step is for a supplier to mark the account as in default. Remember that regardless of arguing with a utility supplier, this will remain on your credit report for the next six years. It could mean you can’t get a mortgage; if you have a mortgage, it may mean remortgaging at a significantly higher rate, and if you need to buy a car, spend on a credit card or get a personal loan, they’re all going to be much more expensive. This will make you far poorer than paying the utility bills in the long run, not to mention you’ll have to make up the payments to the suppliers or risk either a CCJ or a debt management plan which will have enormous implications for more than six years.
So how can you reduce costs as a homeowner and free up disposable income to try and alleviate the rising prices we’re all experiencing? If you own your home with a mortgage, you have two real options depending on your circumstances. Firstly, you may be able to remortgage and extend the term of your loan, which may reduce your monthly payments freeing up some disposable income. However, increasing the term of a mortgage means you’ll pay more interest in the long term so there are downsides to doing this. Although if the choice is between sinking and swimming, chances are it’s the least bad option. Secondly, if you have unsecured debt such as personal loans, car finance, hire purchase agreements or credit card balances, you may be able to consolidate some or all of those into a new mortgage. This is called a debt consolidation remortgage. The first thing to say about this is that it’s not suitable for everyone, and I am not advocating you do this; I’m simply explaining what you may be able to do. There are three implications if you consolidate unsecured debt into a new mortgage. Firstly, you will likely end up paying more interest in total over the term of your mortgage. This is because you are extending the length of time to repay the debts, and because mortgage interest is compound, this often means you pay more back in total than you would be repaying the debt on its own. Secondly, by consolidating debt into a new mortgage, you are reducing your equity stake in your home; if house prices fall, you may find yourself in a situation where the outstanding mortgage is equal to the value of your home. Finally, debt consolidation is classed as higher-risk business. As such, the Financial Conduct Authority (FCA), which governs mortgage advisors and lenders, have precise rules about what can and can’t be consolidated.
So what are the benefits of consolidating debt? The chances are that you would increase disposable income and have fewer monthly outgoings to manage. At a time when it’s disposable income that is being squeezed, the only way other than earning more is to cut outgoings. So after two years of house price growth, many people are sitting on much more equity than they may realise, which can be used to help cushion the blow from escalating prices we’re all facing. Yes, it has downsides, and no, it won’t be suitable for many people, but at a time of worry for many people, it could be a lifesaver for some. This is because if it’s a choice of rearranging your finances or going into the red, ending up with defaults, the impact of which can be felt for over six years, it could be the lifeline that gets you through the next two years. As always, you should speak to a good-quality mortgage advisor to determine what’s suitable and appropriate for your circumstances. Moreover, you should think carefully about securing other debts against your home because your home or property may be repossessed if you do not keep up payments on your mortgage.
If you want to talk about your options, then you can contact us here or alternatively call us on 01623 375007
