Big banks must carry part of the blame for payday lending blight
ANotHER day, another shocking payday lending story – and another opportunity for politicians to jump on the bandwagon.
it’s easy enough. After all, who can you upset by calling for a clampdown on payday lenders?. But it’s not good enough. We know they’re a blight on society, but how do we tackle them?
the scale of the problem is underlined by the report in this section on the dramatic rise in payday loan arrears among debtors in Scotland. Earlier this week, we heard citizens Advice describe the payday lending industry as being “out of control”. its latest report suggested the office of Fair trading’s threat in March to shut down unscrupulous lenders has had little effect.
cue politicians earning brownie points and pledging on twitter, with cameron-esque bluster, to do something about it. What exactly are they proposing? Unfortunately they’re rarely willing – with honourable exceptions such as Labour MP Stella creasy and Lothian MSP Kezia Dugdale – to offer suggestions.
“Payday lenders are popping up and disappearing almost as quickly”
Payday lenders are popping up all over the place and disappearing almost as quickly, only to re-emerge in a different guise. the regulatory system is several steps behind.
it doesn’t help that we’re in something of a limbo period until the Financial conduct Authority assumes responsibility for payday lenders next April, at which point it may consider a cap on interest rates.
But the problem extends beyond the activities of payday lenders. calling for them to be shut down entirely is not only pointless, but also detracts from the need to tackle the root causes of their success.
Most obvious is the growing demand from those struggling with financial difficulties. Why are they going to payday lenders? Because they have little alternative, credit unions and a tiny handful of sub-prime lenders aside; the banks have turned their back on them.
that’s logical from the point of view of responsible lending, but it also flies in the face of their social responsibilities, as citizens Advice pointed out.
Scottish credit unions such as Glasgow, Scotwest and capital offer short-term, easy access loans designed to deter their members from going to payday lenders when they’re in trouble. the rates aren’t cheap – usually 26.8 per cent APR – yet they’re far lower than on payday loans.
So why aren’t the banks offering basic short-term loans? there’s demand, and with the correct procedures they can be an additional source of revenue without piling on bad debts. credit unions aren’t doling them out to people who can’t afford them, and they’re only available to members.
By freezing out so many people in debt and financial hardship, even if they’ve been guilty of the kind of irresponsible practices that got HBoS and company into trouble, the banks have helped create the payday lending phenomenon. they must also be part of the solution. You won’t hear many politicians suggesting as much though.
APRicEwar is being waged in the mortgage market that in theory could slash repayments for borrowers who take advantage. in practice, however, it’s not that straightforward.
tesco Bank this week became the latest lender to cut its rates for those with deposits of at least 40 per cent, lowering its two-year fixed rate mortgage to 1.74 per cent and its five-year deal to just 2.49 per cent.
Yet it pays to look at the small print if you decide to snap up such cheap mortgages. those new deals from tesco come with charges of almost £1,500, including arrangement fees of £1,300. For some borrowers that will wipe out the savings made in switching.
this isn’t an isolated example. the number of mortgages available has risen by more than a third over the past year, while the cost of the average two-year fix has plunged from 4.21 to 3.28 per cent over the same period, according to Moneysupermarket.
But one reason lenders have been able to lower their headline rates to that extent is that they’re offsetting the costs with higher fees.
total fees on the average twoyear fixed rate mortgage have jumped from £1,170 to almost £1,400 since April 2012, Moneysupermarket found.
Even on five-year deals the average fee is up by almost a fifth, to £1,218.
the message is clear: don’t be seduced by headline rates. Lenders have made it increasingly difficult for borrowers to work out the total cost of a mortgage, not only by raising fees but widening the range of different charges levied.
they’re profiting from apathy and ignorance, as in so many products and services, because they know that many borrowers will fail to see beyond the cheap rate. it’s a good time to shop around for cheap mortgages, especially if your savings aren’t keeping pace with inflation. But you could end up worse off if you overlook the small print.
ScottiSH homeowners have an opportunity to slash thousands of pounds and several years off their mortgages – but many are failing to take advantage. More people could be overpaying their home loans while interest rates remain at rock-bottom, experts say. those who can afford to raise their monthly repayments even modestly can clear their mortgage early, yet few homeowners are taking advantage.
Nationwide Building Society this week became the latest lender to ease restrictions on overpayments. Borrowers taking out new mortgages from 29 May will now be able to overpay up to 10 per cent of their mortgage each year without incurring an early repayment charge (ERc), improving – at least for borrowers with larger mortgages – on the previous maximum of £500 a month. Existing borrowers don’t benefit from the change, however.
the move brings Nationwide in line with the market norm, as most lenders cap penalty-free overpayments at 10 per cent of the outstanding balance each year.
And while there has been some pressure on lenders to make it even easier for borrowers to overpay without penalty, mortgage experts believe more homeowners should take advantage of the existing opportunity.
clare Francis, consumer finance expert at MoneySupermarket, said: “if you have money to spare each month, it is well worth considering making overpayments on your mortgage. Not only will it mean you pay off your mortgage more quickly, which could save you thousands of pounds in interest, but could also make it easier to remortgage.”
While the prospect of diverting extra money to your mortgage may not appeal in the short-term, the idea of reducing your mortgage term is attractive.
“it is a message i try to get out there to borrowers that you can clear more when you can afford – paying off 10 per cent extra a year will save you years and thousands of pounds,” said Mark Dyason, director at Edinburgh Mortgage Advice.
An additional motivation may lie in the paucity of inflation-beating savings account currently available. Just a handful of tax-free individual savings accounts (isas) offer a real return once inflation is factored in, and that only after a surprise dip in the cost of living last month. With savings rates falling in recent months and few expectations of that trend reversing any time soon, it’s a good time to review how best to use any spare cash you have lying around.
“With savings rates so low, paying off your mortgage may seem like a better option than putting your spare cash into an account paying next to no interest,” Francis pointed out.
An added bonus of overpaying is that by boosting the amount of equity you have in your home, you improve your chances of getting a decent deal when you next come to remortgage.
Mark Harris, chief executive at independent mortgage broker SPF Private clients, said: “in the shorter term, with lenders continuing to offer the most competitive mortgage rates to those with sizeable amounts of equity in their homes, it makes sense to improve your equity position if you can. overpaying will make you more attractive to lenders and make it easier for you to remortgage.”
overpaying isn’t for everyone, however. those for whom it may be particularly suitable are people whose pay fluctuates, perhaps because they rely on bonuses. Some lenders will allow borrowers to overpay without penalty whenever they can rather than by a set amount each month, although such flexibility will often be discretionary.
Homeowners with interest-only mortgages may especially benefit from overpaying. Few lenders now offer interest-only loans and those that do have imposed tighter criteria, creating problems for borrowers
“Overpaying makes you attractive to lenders and easier to remortgage” Mark Harris of SPF Private Clients
without robust repayment plans in place. Many interest-only borrowers will be forced on to normal repayment plans when their term ends, at which point the amount of equity they have in their home will be key.
“if you can’t afford to go on to full repayment at this point, overpay what you can afford because it reduces the loan, interest and loan-to-value and gives you a better chance of owning your home outright in the future,” said Dyason. So when isn’t it necessarily a good idea? “When interest rates are at record lows, it makes sense to overpay on your mortgage,” said Harris. “However, the reality is that with rising living costs, many people will have been using the savings made each month for other outgoings.”
that also means ensuring you keep some cash back for emergencies. While the temptation to reduce the mortgage term may be a strong one, using all the disposable income you have to achieve it is not advisable, noted Adrian Anderson, director of mortgage broker Anderson Harris.
“While overpaying is a wise move, make sure you keep some money back for emergencies,” he said.
“Money overpaid is notoriously difficult to get back again so don’t plough all your savings into the mortgage, keep some back to pay for a new boiler, washing machine or unexpected outgoing.”
one way around that
is an
offset
mort- gage, said Francis. “With an offset, your savings are linked to your mortgage to reduce the amount of interest you pay on that debt. So if you have a £100,000 mortgage and £20,000 in savings, you’d only be charged interest on £80,000.”
crucially, your savings are kept in a separate account and you can access them at any time.
take care also to avoid overpaying by more than you’re allowed to. if your lender allows overpayments of 10 per cent of your balance each year, you could be hit with a hefty ERc if you exceed that limit even by a few pounds.
See the article on the right for more on the overpayment restrictions imposed by different lenders.