People in debt urged to take action as loan deals shrink
Credit card, loan and mortgage borrowers are being urged to take action on their debt as the options for cheap borrowing start to disappear.
With a total debt of £31,907, including mortgage debt, the average person in the UK owes £539 more now than they did a year ago. That’s 114 per cent of the typical annual income.
The saving frenzy prompted by the lockdown didn’t survive the first round of restriction easing and household debt has been creeping up since the middle of the summer as immediate economic fears
diminished, house prices bubbled, our spending options reopened, and payment holidays started coming to an end. We are now falling back into the red at speed. But while Britons are taking an extra £2.67bn in mortgages and increasing our unsecured debts on credit cards, loans, overdrafts and the like by an extra £811m every month according to the Money Charity, the cheap deals that could help us manage that borrowing more easily are drying up.
Those expecting to continue switching balances between 0 per cent deals could be in for a shock.
In March this year there were still 91 credit cards offering some sort of balance transfer deal, today there are only 66. And while you could have basked in the surety of a 34 month interest-free deal two years ago, the longest balance transfer deal is now just 29 months, if you can get it.
TSB’s Platinum Balance Transfer Card offers the longest balance transfer deal on the market, with a transfer fee of 2.95 per cent, though HSBC’s 25-month deal on its Balance Transfer Credit card comes with a fee of only 1.5 per cent.
Or the Santander Everyday Credit Card currently offers the longest interest-free period with no fee on the debt for 18 months.
But these deals are only open to the best of the best borrowers with squeaky clean credit scores.
Financial ratings and information firm Defaqto suggests an unsecured loan may be a better way to consolidate expensive credit card debt if you owe more than £7,500 and can’t get a 0 per cent balance deal.
Unlike the credit card market, there are still plenty of personal loans and the interest rates are still very low. Today the best rate on the market is 2.80 per cent by Cahoot or TSB for loans of more than £7,500 repaid over 60 months.
Meanwhile, mortgage rates are starting to close up as well. Despite the strongest instability messages the economy can throw at them, house prices are defying gravity, and are now 7.3 per cent higher than they were this time last year. Lenders like Halifax have received more mortgage applications in the last three months than at any time since the financial crash in 2008.
But as we try to borrow more money to keep up with rising prices, the number of mortgage products on offer has halved since March this year.
Despite the strongest instability messages the economy can throw at them, house prices are defying gravity
And they are rebounding quickly from the cheap rates on offer early in the pandemic. Average interest charges for two and five year fixed rate deals are now almost the same as they were in March.
“Borrowers who have yet to take on a new mortgage deal may be disappointed to see that product availability has fallen for the fourth consecutive month,” warns Eleanor Williams, finance specialist at comparison site Moneyfacts.
“At 2,259, this is 153 less than at the start of last month and 551 less than in June, when it seemed the sector was starting to recover from the previous few months of initial shock.”
She warns that 85 per cent is now the maximum loan-to-value (LTV) offered by many providers. At 100 per cent LTV the products still on the market are almost exclusively guarantor or family assist deals, which some first-time buyers may now be considering due to the lack of standard mortgage products for those
with smaller deposits.
Whether you’re lining up a mortgage, credit card, or one of a range of other borrowing options, the lender you apply to will search your credit file and may leave a mark, which could put off other lenders.
Some of the best deals are only available to those with an excellent credit rating and borrowers will not know this until after they have applied. Many organisations offer eligibility checks now, which allow a borrower to check if they will be accepted for credit before they apply without leaving a mark on their file.
For those who are struggling with their debt but aren’t able to move to a new deal, it is worth talking to their lender in the first instance as they may be able to help. Borrowers can also access free, independent advice through the Money and Pensions Service and the Citizens Advice Bureau.
Meanwhile, new rules for lenders chasing those seriously behind on their repayments should be easier to understand and less intimidating as a result of new rules proposed by the Treasury last week.
Default Notices are designed to give people who are falling behind on their debts fair warning before lenders take further action, but much of the formatting and content has not been updated in nearly 40 years.
As part of the government’s effort to support people in problem debt, it will legislate to change the language and presentation of information in debt letters.
The new rules will make debt letters less threatening by restricting the amount of information that must be made prominent and requiring lenders to use bold or underlined text rather than capital letters, note campaigners like the Money and Mental Health Policy Institute.
Lenders will also now be able to replace legal terms with more widely understood words and letters will clearly signpost people to the best sources of free debt advice.
These new rules are the latest in a wide package of support put in place to help people struggling with their finances, especially through coronavirus.
They are expected to come into force in December 2020. All lenders will then be required to make the changes within six months.