With inflation stubbornly high, it seems fair to assume that further interest-rate increases are on the cards, this could lead to loan defaults. On the one hand, bringing down inflation should benefit everyone. On the other hand, raising interest rates will definitely hurt people with any form of debt. That includes mortgages and student loans. It may also hurt their lenders and the taxpayer.
Steps you can take to protect yourself
If you haven’t already had a good look at your finances recently, then now is a good time to do so. This should include taking a look at your credit record to check for errors and potential for improvement.
If you have a mortgage, then now would be a very good time to think very carefully about your current and future situation. If you’re already locked into a deal, then it probably makes sense to stick with it. You can and should, however, make sure to think ahead to your next move no matter how far ahead in the future it may be.
If your current deal is coming to an end or you’re a first-time buyer, then you may want to think seriously about using a fixed-rate mortgage. These do not necessarily work out more economical than variable-rate mortgages. They do, however, give you more stability.
If you’re looking at fixed-rate mortgages, it’s advisable to think carefully about the length of your fixed-rate deal. As a rule of thumb, the less equity you have in your home, the more inclined you should be to go for a longer fix. This may not be the lowest-cost option but it will give you stability while you build up equity.
By contrast, the more equity you have in your home, the more room you have to manoeuvre. You might therefore want to look at shorter-term fixes to give yourself more flexibility. If you have savings, you might also want to look at offset mortgages. These can give you some protection against interest-rate increases while still maintaining flexibility.
We recommend speaking to a mortgage advisor to understand your situation fully.
There isn’t a great deal you can do about student loans. You should however make absolutely sure that you inform the Student Loans Company promptly of any change in circumstances. Then double-check to make absolutely sure that the SLC actually implements the changes. Do not take this for granted.
If you have debt on credit/store cards and/or personal loans, then you need to think carefully about whether you’re getting the best deal for your circumstances. This may not be the same as getting the best overall deal for your money.
From a purely mathematical perspective, it makes sense to pay as much as you can each month so you clear your debt as quickly as possible. In the real world, however, committing to pay as much as you can afford can leave you struggling if you hit a financial snag.
You may therefore find it better to move any consumer debts you have onto a relatively long-term loan with lower monthly payments. This would give you more breathing space each month. You could always aim to pay extra if you can. You can also commit to adopting a more aggressive debt-repayment strategy when your circumstances improve.
Debts and insurance
If you don’t already have some form of income-protection cover, you might want to think about getting some. Income-protection cover will not directly protect you from the impact of interest-rate rises. It can, however, protect you against having to use up savings and/or default if you lose your job and/or become ill.
The three main types of cover you should consider are payment protection insurance (if employed), income-protection insurance and critical-illness cover. Depending on your situation, you might also want to consider life insurance. This can do a lot to make life easier for your loved ones in the event of your death.
For debt advice, please get in touch