Budgets stretched as families approach mortgage nightmare

For many families it is time to batten down the hatches: not just from the gales that have battered the south of England this week, but from the economic storm clouds that are gathering.

Budgets, already tight in many households, look set to be stretched even further this year, with essential bills rising far faster than average earnings. Gas and electricity bills are up by 13 per cent; food costs have shot up by 17 per cent and both water rates and council taxes are rising faster than inflation.

But perhaps the biggest shock for many families will be their mortgage payments. It is estimated that 1.4 million people are due to come of discounted or fixed rate mortgage deals this year. But thanks to the global credit crunch many homeowners will struggle to find another cheap deal.

In fact, many will be unable remortgage at all, as banks and building societies are becoming increasingly picky about to whom they will lend money. So those with little equity in their home, or a poor credit record are likely to be stuck with their current lender.

In all likelihood this will mean will have to pay their lenders’ standard variable rate. Those in this position should be braced for a big jump in their monthly mortgage payments, as most lenders’ SVRs hover about the 7.5 per cent mark – significantly higher than the mortgage rates of 4.5 per cent many people have enjoyed for the past couple of years.

In pounds and pence this means that those with a mortgage of £100,000 will have to find almost £200 extra a month.

Things are not quite so bleak for those that do manage to remortgage but most will still pay more. Expect to see mortgage costs rise by £60 to £100 a month, depending on the size of your mortgage and the deal you opt for. There is likely to be a similar squeeze on other debts, particularly credit cards: interest-free deals disappearing at the rate of knots at present.

Those who have been used to rolling large credit card debts from one zero per cent card to the next could be in for a rude awakening.

If your monthly salary isn’t enough to cover these extra costs what are you options? Well, the first piece of advice is don’t panic. If the thought of finding an extra £200 a month brings on palpitations it is time to sit down and concentrate on basic budgeting.

First, work out what is coming in then draw up a list of what you spend it on. The very act of religiously noting where every last penny goes can help reduce frivolous spending; the same also applies to diets. Knowing it will be recorded in black and white does make you think twice about that £1.89 coffee every morning (and the pain au chocolat on the side).

Look at what you spend and work out where you can make savings. This can be from cutting back on luxuries, be it holidays, Sky Plus etc or by being a cannier consumer and getting a better deal on your mobile phone, utility bills, car insurance etc.

Remember, to take into account savings, which may need to be used in the short term. It makes financial sense to use these funds rather then get further into debt.

If after taking these steps there is still no light at the end of the tunnel, then you need to prioritise which debts to pay. Top of this list should be the mortgage, heating, water and council bills. Non-payment of these could result in court action. Similarly secured loans should be a priority as defaulting will enable the lender to start repossession proceedings.

Talk to all lenders at the earliest opportunity and explain your situation. They should have procedures in place to help and may be able to freeze interest payments, impose a short-term payment holiday.

There are also a number of organisations that provide free advice to those in debt, and in many cases will help a more draw up an action plan. Try to get help sooner rather than later. Missing regular mortgage or loan payment may mean you incur penalty charges, which can significantly increase the amount you owe.

These include the Consumer Credit Counselling Service (0800 138 1111) National Debtline (0808 808 4000) and Citizens Advice (the nearest bureax should be listed in your local Yellow Pages, or go to www.citizensadvice.org.uk). The Financial Services Authority has also published a guide designed to help those who are worried about rising mortgage payments. Go to www.moneymadeclear.fsa.gov.uk for more information.

By Emma Simon

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