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Money Times - 08/04/09

Posted by Jill Kerby on April 08 2009 @ 23:02

CONSIDER CONSOLIDATING YOUR DEBT AS TAX CHANGES BITE

 

The debt problems that many readers find themselves in right now will only be sorted out if it is paid off, written off or inflated away. Borrowing more money will be no solution, unless of course you can reduce the overall cost of servicing your debt.  Consolidation may be best answer.

This column had to be written before the much-anticipated mini-Budget on Tuesday, but I don’t think I’m wrong in predicting that the tax increases and spending cuts that have been announced are not going to make it any easier for someone with personal loans, credit card bills and a mortgage to keep up with their payments. 

It has mainly been mortgage holders who benefitted from the seven ECB rate cuts since last October (from 4.25% to 1.25%). Credit card and overdraft rates have actually been going up and not every personal loan borrower has been given the lower interest rates that some lenders have advertised. 

 

PERSONAL LOANS/CREDIT CARDS

The ECB rate cut is unlikely to have any effect on your personal loans or overdrafts which are typically still in the region of 9%-10% and c12% respectively.   Shop around for the best lending rates and don’t necessarily expect to get the ‘headline’ one:  the lower the sum you want to borrow, the higher the interest and your credit rating will be taken into account. NIB, Halifax and AIB currently offer the lowest loan rates (according to the Financial Regulator’s survey, see http://www.itsyourmoney.ie/personalloancomparison )

Overdrafts should be used sparingly, and ideally only if you have set up a budget plan account with your bank that spreads all your bills over 12 months with the overdraft kicking in only during those months when outgoings exceed your income. 

Credit card rates – which average at about 15% between the 12 providers (see rate survey at http://www.itsyourmoney.ie/creditcardcomparison) - have been going in the opposite direction to the ECB – upwards for cash withdrawals and penalties if you miss payments or go over your agreed credit limit.  

The cheapest cards are currently available from AIB and Bank of Ireland, at 8.5% and 9.5% respectively and the dearest is from Ulster Bank at 17.9%.  You need to check minimum income requirements and other conditions before you apply for one; keep in mind too, if you switch providers, that there are only three 0% card rates available: from Halifax (6 months), B of I (6 months) and NIB (5 months) after which you go onto their higher ordinary rate.

 

MORTGAGES

If you are struggling with your debts now, you should move quickly to consolidate them onto your mortgage if your lender can be convinced you are a good risk.  (If all you have are problem personal and credit card loans, check out your local credit union: they are often very sympathetic to people wanting to clear their unwieldy unsecured debt.)  

Nearly all the main lenders (except Ulster Bank and KBC – formerly IIB Bank) have agreed to pass on the latest ECB rate cut to mortgage holders. For some lucky borrowers with long standing and very low tracker premiums, this means their repayment could now be as little as c2% - c2.25%. 

Even those people with ordinary variable rates, now down to just 2.75%-3%, will have seen monthly savings on a €250,000, 30 year, homeloan in the region of €500, or €6,000 a year.  Refinancing personal and credit card debt onto this rate would represent a huge overall monthly savings and a way to stave off the worst of the additional tax burden you will soon be carrying.

Tracker mortgages are no longer available, but if you are in a secure job and have a healthy amount of equity in your home you might consider switching either to a cheaper variable rate provider or even considering a two or three year fixed mortgage rate. 

AIB brought their three year fixed rate of 3.1% and National Irish Bank, a two year rate at 2.83% down with the March ECB rate reduction and may yet bring it down again after last week’s cut. Check with your own lender to see what their fixed rates are and get them to work out the overall monthly savings if you were to add personal loan balances as well. 

The most important thing to do, IF you can refinance your debts is to try and increase the repayment – even by €50 a month – so that the short term car and credit card debt doesn’t end up attracting 20 or 25 years of long term interest.

Most of all, of course, you mustn’t build up any more personal or credit card debt until it is paid off.  Your priority must be to cut your spending and outlay to the bone; and hope that the hair-shirt tactics our government has adopted actually works.

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