MONEY COMMENT
My Three Biggest Financial Fears

By Cliff D'Arcy
June 26, 2003

Yesterday, I was talking to a friend who is a homicide detective in the Metropolitan Police CID. Obviously, his working life is often extremely traumatic, which is why he is genuinely looking forward to retiring on a decent pension in seven years' time. Obviously, as a serving policeman, he is very concerned that many people live in fear of becoming a victim of crime.

However, my response was: living in a London borough with a very low crime rate, it's not a big worry for me. Being a financial scribbler, I went on to tell him of my three greatest money worries:

1. House prices and the £700 billion mortgage burden

I'm worried that a massive increase in house prices over the last five years has left many homeowners with record levels of mortgage debt. Okay, so we have little problem meeting our monthly repayments with interest rates at a 48-year low, but many homeowners are going to get a nasty shock when the interest-rate pendulum starts swinging the other way.

What's more, house prices have been falling in my neighbourhood for more than six months. My home is now worth £25,000 less than it was in November. Also, I noticed the price of one property that's been on the market for too long was reduced from £570,000 to £470,000. A hundred-grand drop and it's still not sold!

Still, with a growing family, I need a bigger home – and soon. Hence, falling house prices are to my benefit, as I'm moving up. Mortgage rates don't bother me either: if they start rising too rapidly, I'll use some capital to pay off our home loan. But still I worry...

2. Escalating consumer debt

At least monthly repayments are modest while mortgage interest rates are low. Personal loans and plastic cards are another burden on our finances: this time, a hefty £161 billion. Shared between the 25 million households in the UK, this comes to £6,440 per home, but many problem borrowers owe far more.

The big problem with consumer credit (or consumer debt, as it should be called) is that it's pretty darned expensive. Some credit card issuers charge up to 25% interest per year, with the average around 15%. Although it's so easy to find personal loans with APRs under 7%, most punters go into their local high-street bank to pick up a loan at 15% APR – d'oh!

So, with mortgage interest rates somewhere in the region of 5% across all (new and existing) borrowers, we're paying roughly £35 billion a year in mortgage interest. However, at an average interest rate of 15% APR, our consumer debt attracts an annual interest bill of £24 billion. This is two-thirds of our mortgage interest, and what have we got to show for it? Aaarrrgh!!!

3. Pensions

It's a wonder that the UK can afford to save anything towards retirement, with an £861 billion "debt gorilla" on our backs. We're simply not saving anything like enough for our grey-hair days. Firms are closing attractive company pensions left, right and centre, then replacing them with inferior substitutes. Furthermore, most people making private pension provisions aren't saving enough or have decided to get by without a pension.

Assuming I go the distance, my State Retirement Pension will begin in 2033. However, I plan to retire long before then with a tidy income from company and private pensions, ISAs, property and so on. There's a retirement time bomb ticking and I aim to be wealthy enough to dodge the blast when it goes off!

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