Money MATTERS

Mortgage terms, insurance, pension: the worst ways to boost your monthly finances

Not all cost cutting is a good idea - make the wrong changes to your spending and it could end up costing you.

It is no secret that the UK is in the midst of a cost of living crisis. At Brian Mole IFA we fully appreciate this, however think very carefully before you start making cuts in your monthly outgoing that could cost you more in the future and long term regrets.

With the price we pay for virtually everything on the rise, more and more households across the country are looking for ways to cut their outgoings and save some cash. However, it is worth remembering that there are good and bad ways to go about this, with some methods actually leading to bigger financial issues down the line. Extending your mortgage term

The amount that your mortgage ends up costing you comes down to more than just the interest rate; the mortgage term will also have a huge bearing on just how much the loan sets you back overall.

When times get a bit tougher, then extending the size of your mortgage term can be an attractive idea. After all, doing so will lower the size of your monthly repayments.

For example, let us say you owe £150,000 on your mortgage, and you are currently on a product with a 3% interest rate. Over a 25-year term, your repayments will be around £711 a month, but by stretching it to a 30-year term you can drop that down to £632.That is a ‘saving’ of around £80 a month.

The trouble is that it is not a saving, really. Extending the mortgage term actually means you end up paying far more in the long run. To take the example above, the extension means the overall cost of repaying the mortgage moves from £213,358 to £227,621, an extra £14,000. So, while a longer mortgage term can buy a little breathing space in the short term, it can end up having long term repercussions.

Ditching crucial insurance policies

Going through your finances to spot some areas where you can make cutbacks is a smart budgeting move, but it is important not to ditch outgoings that offer long-term benefits.

A perfect example here can be insurance policies, particularly things like life insurance and income protection.

It can be easy to convince yourself that having that extra £50 or so each month is your priority, but ultimately you are taking a big gamble.

If you passed away, would your family be able to cover the mortgage? Or would they be left with tough decisions to make over selling up the family home?

Similarly, if you lost your job would you still be able to meet your regular outgoings? This is a particularly big consideration for the millions of self-employed. There can be a further sting in the tail with scrapping these policies, should you look to start them up again later in life.

Stop paying into your pension

When money is tight, then it can be really difficult to keep long-term priorities in mind.

As a result, plenty of people will currently be pulling back on their pension contributions, or even ditching them entirely. For some, this will be a necessity, but if you can afford to keep contributing something towards your pension it really is a good idea.

The longer the money is invested, the harder it is working, and that means a bigger pension pot when you eventually retire.

Let us be realistic here - how many older people do you meet who wish they had saved less for their retirement?

If you can find savings elsewhere, then keeping up with the pension is really worthwhile, particularly if you are in a workplace pension scheme where your contributions are topped up by your employer. That is additional free cash which could go a long way once you leave work.

Borrowing to pay bills

Around one in seven people are having to borrow in order to make ends meet at the moment, according to figures from the Office for National Statistics.

Ultimately this is not a long-term solution - those bills are not going anywhere, but you will then have the additional costs from the borrowing to add on top.

Again, it is a short-term ‘answer’ that only leads to more problems, and higher costs, down the line.