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FOOL'S EYE VIEW
By
Britain's obsession with the house-price boom is reaching fever pitch. I've tittered at recent hysterical press releases issued by mortgage lenders, estate agents and other vested interests. The 'surveys' they produce seem to be ever more desperately scouring the country for good news and, furthermore, they seem to be coming out more and more frequently. You know the sort of thing, "House Prices in Cumbria Soar 0.01% Over the August Bank Holiday Weekend!" and so on! However, there's no need to fear falling house prices. In fact, millions of people would benefit from a property slide, including future first-time buyers and homeowners who plan to move into a larger property or a more expensive area. All the same, if you're worried that falling house prices may put the squeeze on your finances, check out these tips on beating those housing blues! 1. Overpay your mortgage What can you do if you don't have much equity in your home (the difference between the value of your house and your mortgage)? This could be because you only put down a small deposit, or took out a 95% or 100% mortgage. If you are in this situation, and are worried that sliding house prices could gobble up what little equity you have, it's a great idea to start over-paying on your mortgage. Paying off your mortgage (and other debts) is an excellent use of any spare cash you have, because you effectively 'earn' tax-free interest at your mortgage rate. For example, if you're paying the typical standard variable rate of 6.75%, paying £1,000 off your home loan will save you £67.50 a year in interest. To earn this much in a savings account, you'd need to be paid interest at 8.44% - because the taxman takes a fifth (20%) of your interest, and four-fifths of 8.44% is 6.75%. For higher-rate taxpayers, who lose two-fifths of their interest to the taxman (40%), the equivalent savings rate is a whopping 11.25%. According to London & Country, a borrower with a £100,000 mortgage paying a mortgage rate of 4.75% could reduce his/her overall interest bill by £11,396 simply by making overpayments of a mere £50 a month. What's more, over-paying can dramatically cut the life of your loan: the term of this mortgage would be cut from 25 years to 21½ years. Imagine being mortgage-free 3½ years ahead of schedule, or even earlier. Fantastic! Warning: make certain that your lender won't penalise you for over-paying, and check that any over-payments will reduce your loan balance from day one, not be in limbo for up to a year! 2. Improve your home If market forces are causing the value of your home to fall, why not add some value yourself? Last year, we Britons spent £16 billion on DIY and gardening projects, much of which added value to our homes. However, before you embark on any grand home-improvement project, you need to be aware that your tastes may not be everyone's cup of tea. Get it wrong and you could end up lowering the value of your humble abode! Read these articles to avoid the most common DIY and design crimes: 3. Start saving for your next property One simple way to increase your wealth is to 'save' into your mortgage (see point 1). However, it's also worth having a separate savings pot, into which you could save for general expenses, a holiday, a car or even a bigger home. If you plan to save less than £3,000 a year, which most of us do, open a cash mini-ISA today. You can save a maximum of £3,000 into one, and every penny of interest that you earn is tax free. You'd be bonkers to save without a cash mini-ISA! If you've already used up this year's ISA allowance but want to save more, open a savings account that pays a market-leading rate of interest. You should look for an annual interest rate of 5% or more. Generally, the highest rates come from online or telephone accounts. For example, the popular ING Direct account pays 5% AER. 4. Fix or cap your mortgage repayments If you're worried about future interest-rate rises (the Bank of England has raised its base rate five times since November, a total hike of 1¼ percentage points), think about getting a fixed- or capped-rate mortgage now. These give you the security of knowing exactly what your repayments will be. Two-year fixed rates can be under 5%, with five-year deals coming in at under 5.5%. Warning: be wary of mortgages with 'extended redemption penalties'. These financial handcuffs lock you in to an unattractive rate for years after your initial sweet deal has ended. The initial low rates may look attractive, but horrors lurk in the small print! 5. Get more (or cheaper) protection Imagine the scenario: house prices start falling, your equity is shrinking and money is tight. On top of all that, you have an accident, fall ill or lose your job. How stressed would you feel? Buying a home is a long-term commitment, so you need long-term protection to match. Think about buying more (or finding cheaper) insurance, such as: However, tread carefully when buying mortgage payment protection insurance (MPPI). Almost three million mortgages are protected by these policies, which pay out when borrowers are unable to work due to accident, sickness or unemployment. (Hence, they also go by the name of ASU cover.) Lenders and insurers rake in up to £1 billion a year in MPPI premiums, yet pay out as little as a quarter of this sum to claimants. Therefore, this cover is four times as expensive as it needs to be, plus lenders are grabbing up to £750 million a year from our ignorance! The rule is: DON'T buy MPPI from your lender, as it's easy to find a similar policy cheaper elsewhere. Learn more about protecting yourself, your home and your family in Ten Ways To Protect Your Wealth. And, whatever you do, don't lie awake at night worrying about house prices. Instead, put some time into strengthening your personal finances and you'll be a happier homeowner! More: Check out the bargains in our Mortgage, Savings and Insurance centres.