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Enlightening article on Yahoo

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  • Enlightening article on Yahoo

    I found this article on Yahoo in their finance pages: It shocked me as I had know idea so amy brits were on interest only mortgages:


    7 ways to beat the bank
    By Sarah Modlock
    I am giving you my very best game show hostess smile and inviting you to play a game of beat the banker...... Here's hoping some of these tips could save you some money in these gloomy times.
    1. Current accounts
    Notoriously poor on interest, these everyday financial necessities are now becoming popular again in an unexpected way. As savings rates plummet to as low as 0.29%, research from the Post Office reveals that one in five savers are now keeping their cash in a current account because it offers the best rate available. This means that if £2,500 was kept in Alliance & Leicester's current account, over a year savers could earn £120.88, or £110 at Abbey.
    Banks have even taken over the mantle from the building societies by offering the most competitive overall deals on both savings and mortgages according to Moneyfacts.co.uk.
    Richard Norman, Post Office director of Savings, said: "Despite many people believing now is the worst time ever for savers, it is encouraging to see that 61% of people are continuing to save." With only a quarter of those surveyed saying they had shopped around for the best deals, he advised people to chose carefully and switch if necessary at a time of hundreds of poor paying accounts. And remember, it may not be your existing bank that offers the best deals - don't be afraid to switch and save.
    2. Overdrafts
    In a world where savers are suffering, it's easy to assume that you have it all your own way if you're a borrower. Not so. Overdraft rates are soaring as banks try to recoup their losses. You may not even realise that your interest rate has gone up unless you read the fine details of the updated terms and conditions you get in the post. Rates rose by as much as 7% with some banks last year. But according to the Bank of England, customers who go overdrawn on their current accounts are being stung by average rates of 18.62%, up from 17.58% this time last year. Shop around rather than just settling for what you are offered.
    3. Borrowing
    We are being told to spend more but there is no sign of any loosening of the purse strings when it comes to getting credit. It's a fine balance. You should avoid trashing your credit record by applying for dozens of cards or loans in the hope of getting one to say yes but don't assume that if you are knocked back by one lender you will not be accepted anywhere else.
    If you have a pretty healthy credit score (it's important to check your records regularly and ensure there are no errors) then cut out the banks altogether and consider Zopa.com. The first people-to-people marketplace for lending and borrowing has arranged a cool £36 million in loans between its 250,000 members. Sub-prime borrowers are unlikely to become Zopa customers though. All Zopa borrowers - who undergo a stringent vetting process - are rated A*, A, B, C or 'Young' according to their creditworthiness and this will be factored into the interest rate they are offered.
    If a borrower likes the rate that is available to them, he or she simply clicks the button to accept the loan. If they think the rate is too high they can revisit a day or two later to see if more competitive offers have been made. Once a borrower accepts a loan offer, Zopa arranges for the interest to be paid by direct debit into the lender's holding account, from where it can be withdrawn or even re-lent. Borrowers pay a fixed fee of £118.50 which is added to their loan and reflected in the APR figures quoted. There are no hidden charges or any form of early repayment fee.
    4. Debts
    Latest research shows from independent advice campaigners Unbiased.co.uk shows borrowers must work an average of 83 days a year just to earn enough money to pay the interest on debts. If you're concentrating on getting debt-free, make sure you're paying as little as possible in interest. Consider switching credit card balances to 0% cards. These offers usually last for 12-15 months which will help you pay off more. For monster balances, there are many cards which offer a very low interest rate for the life of the balance. If you have a loan to pay off, make sure you know about any early repayment fees which would apply if you switched the loan to another lender for a better rate. You could still save if the new interest rate is low enough but you need to do your homework first.
    5. Savings
    Don't leave your money sitting in a limp account in the hope the rates will pick up soon. You can be sure that there will be a fanfare when they do increase and you can shop around for a new account then. Consider Premium Bonds, which offer a chance of tax-free prizes up to £1million. They also keep your capital safe but remember your money won't grow. Alternatively, consider lending to save - via Zopa.com. At the time of writing, Zopa lenders are achieving returns of 8-12% gross (after Zopa's 1% annual charge and bad debt are deducted, but excluding tax) depending on the group of borrowers chosen. The average rate of return lenders have been getting on loans made over the last nine months is actually more than 9%. And because these loans are at a fixed rate, so are the returns, typically over three years which is the most common term.
    Lenders can make loans from as little as £10 but once they lend more than £500, the money is spread between at least 50 borrowers, to minimise risk. The lender specifies how much they are willing to lend and over what period (between one and five years). They are then asked to choose the price at which they are willing to lend. If a lender's loan rate is too high, there will be no takers and the money will simply sit there in their holding account.
    Borrowers can apply for loans of between £1,000 and £15,000. They are carefully assessed for credit worthiness and the affordability of the loan they are seeking. Lenders and borrowers enter into a legally binding contract with each other and Zopa manages the collection of monthly repayments. If a repayment is late, Zopa chases up the borrower in the same way a bank would and uses the same recovery processes if it comes to that. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading.
    6. Student loans
    Here's one to pit the rate-starved savers against the 'soap-shy' students.... it may sound like a bizarre joke but it's entirely possible that those with student loans will soon be owed money instead of having to repay what they have borrowed. How could this happen? It's the crazy economy. The interest charged on student loans each year matches either the Bank of England base rate plus 1%, or the Retail Prices Index (RPI) in March - whichever is lower. The latter is forecast to be 0.1% which would push students into negative interest. But before the hall of residence and local pubs start filling up with happy borrowers planning to 'reinvest' their new-found wealth, it is in no way certain that the Treasury will allow this to happen. There's nothing in the small print stating the rate can't go negative, but there's nothing to say a cap can't be imposed either. .
    7. Mortgages
    The news has been full of stories about home owners who face a monthly mortgage bill of just 1p after the last bank rate announcement. Ben Cameron and his wife Nicola are being charged the sum after signing up for an interest-only tracker deal in December 2007. Their mortgage with Cheltenham & Gloucester tied their payments to 1.01% below the base rate, which then stood at 5.5%. Since then it has fallen to 0.5%, cutting their monthly bill from around £1,500 to zero. As their lender's computer system cannot cope with zero payments, they are paying a nominal 1p per month.
    Just make sure you don't get too smug to set up a decent savings and/or investment vechile to build up the money you need to repay the capital of the mortgage. Research by LV= shows that 1.3 million interest only mortgagees (45%) have no vehicle for repayment behind them, while some 456,000 interest only borrowers could be in negative equity by the fourth quarter of 2009.
    Mike Rogers, LV= group chief executive, said: "A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home. However, this strategy may have been overturned by current and predicted future falls in property prices. These people should therefore seriously consider investing as much as they can now, and regularly, to help pay off the mortgage capital at the end of the term. We urge interest-only borrowers with no firm capital payment plans to review their options, save as much as they can regularly, and seek professional advice early if needed.”
    Shockingly, LV= also found one in ten interest-only borrowers said they did not realise they were only paying interest and would need to find additional money to pay off the capital. Nearly half said they could not afford to put aside any additional payments, on top of the mortgage interest.
    The message here is clear - make hay while the sun shines, but you'd be mad not to set aside some or all of the spare cash from a low-interest rate environment, for a rainy day...
    The mission of any business enterprise should include the aim to develop economic conditions rather than simply react to them.