Buying a home is generally one of life’s most significant events, even for those who have been through the process before. This being so, getting the right mortgage can have a major impact on the family finance.
What Kinds of Mortgage Are Available?
With a repayment mortgage, the monthly payment covers both the capital sum borrowed and the interest due on it. At the end of the term, the mortgage is guaranteed to be paid off in full, providing all the payments have been made on time.
With an interest-only mortgage, the monthly payment is simply to cover the interest owed. At the end of the term the borrower needs to pay off the capital sum borrowed in full.
With an offset mortgage, the borrower essentially has access to a giant overdraft, which is available for a fixed term. The balance must be paid off by the end of the agreed term..
What Are the Main Benefits of an Offset Mortgage?
The benefit of offset mortgages is that the savings made by reducing the interest due on the capital sum borrowed will be greater than the interest earned on money held in a standard current account or instant-access savings account.
Interest income is liable to tax, and the amount of tax due (if any) will, of course, depend on an individual’s circumstances. For working-age adults however, there could be significant savings to be made by foregoing taxable interest income in favour of reduced interest charges.
Offset mortgages offer a higher degree of flexibility than either repayment or interest-only mortgages. Borrowers on regular incomes can calculate how much they need to set aside each month to have their mortgage paid off by the end of the agreed term and stick to that. Borrowers with more variable incomes can increase and decrease their payments in line with their earnings. Likewise borrowers can dip into their savings, if they find they need or want to. Hence overpayments can be made with confidence, since the money can be withdrawn if necessary rather than being locked away.
How Is Interest Calculated with Offset Mortgages?
In terms of interest, offset mortgages typically work in the same way as repayment and interest-only mortgages. They may be fixed-rate, which means that the interest rate is set for a specified period. They may also be tracker mortgages, in which the rate charged to borrowers goes up and down in tandem with changes in the interest rates set by the Bank of England.
Are There Any Disadvantages to Offset Mortgages?
Not so much a disadvantage, more as an observation, is that offset mortgages can be harder to find than either repayment or interest-only mortgages. Borrowers may therefore have to look a bit longer before finding one. Borrowers may also find it more challenging to move from one provider to the other in search of better deals (e.g. new fixed-rate deals). While it is quite possible that the availability of offset mortgages will increase as people become more aware of them, this cannot be guaranteed.
Likewise, some people may prefer the security and imposed discipline of repayment mortgages, even if they may not be the best deal from a strictly financial perspective. The flexibility of offset mortgages may lead to temptation or alternatively to individuals being overly worried about spending money which has been put into their mortgage fund. Getting some advice from a financial adviser can help to resolve these issues and give you the best chance of finding the right mortgage for you.
When thinking of the family finances and your personal wealth, savings and investing may be at the top of your agenda. For some people however, life insurance can be a crucial part of taking care of dependents and loved ones in the event of their (untimely) death. With this in mind, it can be helpful to understand what options are available and how they can apply in the real world.
Option 1 – Term or Whole Life?
A whole-life policy, as its name implies, is valid for the whole of your life. In other words, it is guaranteed to pay out at some point, providing you maintain the premiums. A term policy will pay out if you die within a certain period of time – the “term” of the policy. Term policies can be useful to cover a present need, which you assume will be resolved at a set point in the future. For example, it could cover the period of a mortgage or the period until minor children become adults.
Option 2 – Level, Increasing or Decreasing Benefit?
The next question is whether you want the level of cover to stay the same over the term of the policy (level term), whether the level of cover should go up of the policy (increasing term), or whether the level of cover should go down of the policy (decreasing term).
Your choice is likely to be influenced by the purpose of the policy. For example if the insurance is purely to cover a repayment mortgage, then a decreasing-term policy could offer the best value for money. The need for insurance cover will reduce as the outstanding mortgage is reduced and therefore there may be nothing to be gained from having extra cover. If, on the other hand, the policy needs to provide for young children in the event of the death of a parent then an increasing-term policy could be used to ensure that any benefit keeps pace with inflation.
Option 3 – Lump Sum or Family Income?
A lump-sum pay-out can help with the immediate financial aftermath of bereavement. For example it can take care of funeral expenses or pay off a mortgage. On the other hand, suddenly coming into a large sum of money can bring its own problems. There is no shortage of real-life stories about lottery winners who have wound up in poverty due to having mismanaged their wealth. Some people may find that suddenly having responsibility for managing a child’s inheritance creates more stress during an already difficult period. They may prefer the security of knowing they will have a regular monthly (Family) income to replace the deceased’s financial contribution.
Key Question – What Level of Cover Is Required?
Having too much cover might cost money which could be used elsewhere. Having too little cover could pose serious difficulties for your loved ones in the event of your death. That said, if you are on a tight budget, then having even some cover may well be better than having none at all. Again, the ideal level of cover will depend on your individual circumstances.
Planning for the Future
As the old adage goes “Hope for the best, prepare for the worst”. A financial plan should cover both the best case scenario (a long and happy retirement) and the worst case scenario (an untimely death). Because of this, it can be hugely helpful to get some advice from a financial adviser. This is particularly true for people who need to ensure that young children will be provided for in the event of the death of one or both parents. Even those without children, however, need to think of their own plans for the future, and how they are going to finance them.
The combination of the expense of Christmas followed by New Year resolutions can lead people to think about the state of the family finance in general. Some people may even make a resolution to increase their personal wealth in 2015, in which case investing some time in getting advice from a financial adviser could be a great place to start. Whatever your financial plans, for many people having an appropriate level of savings is key to managing life’s ups and downs.
Broadly speaking, savings can be grouped into four main types.
The Emergency Fund
The emergency fund, as its name suggests, is for life’s unexpected twists and turns. Because you never know when you’re going to need to access it, your fund should be held in a place where you can access it quickly and easily wherever you are and regardless of the time of day. How big your fund needs to be depends on your personal situation. It’s also a good idea to make time to carry out regular reviews of your insurance to ensure that you always have the right kind(s) and level of cover for your needs. At the same time, think about what your insurance doesn’t cover and what that means for you. The most obvious example of this would be having cash to cover your insurance excess.
The Fun Fund
In spite of its name, the fun fund has a serious side. By giving yourself an allocated budget just to enjoy yourself, you can prevent your fun being spoiled by the headache of overspending.
Life-cycle savings can be sub-divided into two groups – household life-cycle and personal life-cycle.
Household life-cycle savings refers to the fact that many household items have a restricted lifecycle and at some point will need to be repaired or replaced. Since this is a foreseeable event it can be included in the family budget. Ideally whenever an item is bought, you should start planning for when you need to replace it. For example, electrical goods bought from a shop (as opposed to from a private seller) generally come with a warranty. They may well continue to function after the warranty period, but ideally you should plan to be able to replace them as soon as this warranty period ends.
Personal life-cycle savings relate to the key milestones in life: births, deaths and marriages. While many of these can be both exciting and joyful (such as the birth of a new child); they can also be financially challenging. It can therefore be hugely helpful to plan ahead so that when the time comes, you can focus on enjoying the event, without having to worry about how you’re going to manage to pay for it.
Saving for retirement has become a major topic in recent years. Workplace pensions can be a very useful means of saving for retirement, however they are not necessarily appropriate for everyone. To begin with, they only apply to those who are in paid employment. Therefore, by definition, those in other situations, such as home-makers or the self-employed will need to look at other arrangements.
It’s also worth remembering that saving for retirement does not have to begin and end with a pension. There are a variety of investing opportunities, which could be used to fund your dream path through your golden years. Some people might prefer to use a combination of pension savings and alternative savings to strike an acceptable balance between security and the prospect of increased rewards.
Type “unwanted gift” into eBay and see how many results you get. In theory it may be the thought that counts, in practice these days it’s far from unusual for recipients to turn gifts they would prefer to forget into cash via sites like eBay.
Some people might find themselves the unwitting donors of such items due to reluctance to give cash as a present. Ironically the end result of this may be that the recipient ultimately winds up with less cash than the donor spent on the original gift. A more modern take on the cash versus gift conundrum is for people to set up accounts on payment sites so that their nearest and dearest can make contributions to a large-ticket item they want to buy. Depending on the site, however, charges may be levied, which again obviously affects the value of the gift. With Christmas coming up, the thought of gifts and budgeting is becoming more topical and so it’s worth looking at the matter from another angle.
The most valuable gifts are those which make a real difference
The very best gifts are those that improve a person’s life in some way. There are lots of ways this can be achieved; for example a good book, some quality toiletries, or a theatre ticket, if well chosen, can all bring the recipient some quality “me time”. Some of the best gifts can be those that money can’t buy. These can include investing the time to pass on knowledge and skills to another generation. Looking back on childhood, memories of learning new skills such as cooking, gardening and cycling can be at least as important as any tangible gifts.
Financial skills can prove invaluable in adult years
For generations parents have taught their children the importance of managing the family finance, part of which involves having savings available for when you need them. Even in today’s world of electronic payment systems and (almost) instant transfers, a quick look on eBay will confirm that there are still plenty of old-fashioned money boxes for sale. Some of these are collectors’ items from bygone eras, but there are many which are newly manufactured. These can be ideal for giving very young children their first lessons in building personal wealth.
It takes more than pennies to support a child into young adulthood
Parents and other family members, however, will be acutely aware that putting pennies into jars, although better than nothing, is unlikely to cover the cost of raising a child to adulthood, particularly if they want to go to university. The expected arrival of a new-born can, therefore, be a very good time to seek advice from a financial adviser. Even if the child is already here, it can still be worth seeing what steps can be taken to prepare financially for their future.
Grow the value of your gift with tax savings
One option is to invest in a Junior ISA. These are currently available to all under 18s except for those born between 1st September 2002 and 2nd January 2011 as they have Child Trust Funds. Like their adult counterparts, Junior ISAs can be held either in cash or in stocks and shares. A child can have one cash and one stocks and shares Junior ISA. .
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED
The popularity of multi asset funds as a means of investment has grown in the past five years. The recent financial crisis has led to periodic crises and underperformance in a range of markets so funds that diversify have become more appealing.
The Investment Management Association classifies a multi asset fund as an investment product that diversifies, holding a minimum of 20 percent of its value in shares and a maximum of sixty percent in shares. It must have at least 30 percent invested in fixed income such as corporate and government bonds, with a minimum of 60% in established currencies, of which 30% must be in sterling
Previously, these funds existed as balanced funds, divided between shares and bonds. A multi asset fund offers more than simply a binary division between shares and bonds, and some investors believe this might be advantageous as the world economy is still highly volatile.
A very flexible fund in uncertain times appears to offer investors both rewards and security but it is important to examine the charges that apply to each fund and also the costs that the fund will incur switching from shares and bonds to other investments.
A fund manager will naturally be keen for you to take up the investment opportunity he is presenting you with, but no matter how attractive and versatile a multi asset fund sounds, you need to be able to question whether or not you or the fund manager gets more out of the deal.
The charging structure should show this. With a multi asset fund there may well be more to charge for, though you might also find that even with these increased costs the investment still makes sense.
As with all types of investment there are multi asset funds to suit different needs.
Some will spread risk more evenly and offer returns based on a lower level of potential volatility, others suit the more seasoned investor.
You will probably hear a lot more about multi asset funds in the coming months. The UK has become the fastest growing market for the funds in the last year after recent reforms to the investment landscape made other policies less lucrative to investment firms.
It is therefore a good idea to explore your own personal needs with a financial advisor before you make any major financial commitments to one fund or another.
THE VALUE OF INVESTMENTS AND ANY INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.
Christmas comes but once a year and for all the fun it brings it can be a significant drain on the family finance. With that in mind, it’s worth looking at opportunities to see where savings can be made. While it may still be too early to put up the decorations, some of the best Christmas bargains require a bit of advance planning.
Food and Drink
Think about having a non-traditional Christmas. Christmas dinner does not have to mean turkey (or any other kind of bird) and all the trimmings followed by Christmas pudding. Going vegetarian or opting for cheaper forms of meat can cut the costs without compromising on taste. Likewise, dessert can be anything you fancy rather than something which is specifically made for Christmas.
Actively compare the cost of making food at home as opposed to buying it ready made. Neither is necessarily cheaper or better. Be prepared to consider the budget/own-label brands. You may be pleasantly surprised.
Get in plenty of “soft” drinks. Keep expensive wine and spirits for particularly special times. For the rest of the time serve soft drinks either on their own or with a dash of alcohol (e.g. in a punch). This can help to make the expensive alcoholic drinks go much further.
Entertainment and Travel
If at all possible, book Christmas entertainment and travel well in advance. It can also help to be flexible when looking at your options. For example, whilst air and rail can be both quick, the bus can be substantially cheaper. Likewise smaller, more local entertainment venues can also put on very good shows, which can be substantially more affordable than their larger-scale counterparts. It can also be worth looking at whether signing up to a loyalty programme can cut costs even further. Similarly cultural venues may have a “friends of” programme with discounts.
Cards and Gifts
This is arguably one of the trickiest areas of Christmas. The key to managing it is setting expectations. This starts with setting a realistic budget, which means one that you can comfortably afford. Your budget is a limit not a target and if there is a conflict with it and your plans for card and gift giving, then you should change your plans, not your budget. Make a list of all the people to whom you want to give cards and/or gifts at Christmas. The key word here is want. If you routinely send gifts to people just because you know they’re going to send one to you, then put those names on another list. Contact these people well before Christmas to make them tactfully aware that you’re only planning to send a card this year. They may be relieved.
Your next challenge is to make your money go as far as possible. Ways to achieve this include: watching the internet carefully for special deals and flash sales; buying second-hand and creating home-made gifts. These can not only be welcome gifts in their own right, but help to keep the pennies for when they are really needed. Adults and older children could even be given IOUs for items which are likely to come down in price in January.
Avoiding New Year Financial Headaches
Keeping control of spending at Christmas can help you avoid a nasty money hangover at New Year. Why not go one step further and a make a resolution to review your personal wealth this coming year by investing some time getting advice from a financial adviser?