Cost of living crisis: You can cut your bills, but there may be pitfalls | consumer affairs
As the cost of living crisis worsens, you may be evaluating your regular monthly expenses and looking for things you can reduce.
If you’re lucky enough to be a homeowner, your biggest monthly expense will likely be your mortgage. But will your lender allow you to lower your payments if you explain that you are having difficulty? And how will this affect your credit report?
Also, if you have life insurance or a pension, can you pause your payments and what will be the consequences?
Take a break from your mortgage
According to UK Finance, the banking trade association, mortgage lenders should offer a “forbearance” to any customer who is in financial difficulty or unable to make their mortgage payments.
This could take the form of an authorized payment holiday, where your lender allows you to not pay your mortgage for a short period of time, usually up to three months. Alternatively, with your lender’s permission, you may be allowed to reduce your monthly repayments.
These arrangements come at a cost. Any payment holidays will be noted on your credit report, which could have repercussions the next time you want to borrow money – you might, for example, have to pay a higher interest rate. You’ll also have to repay anything you missed once you’re no longer in financial difficulty. Your mortgage will likely cost you a lot more in the long run.
“The big downside to payment holidays is that you end up with a bigger mortgage to manage when you start making payments again,” says David Hollingworth of mortgage broker L&C.
Every day you don’t reduce the original amount you owe, you’ll accrue interest on it. In addition, you will have to catch up on missing payments.
That means “you end up making a higher payment for the rest of the mortgage — because you have a bigger mortgage,” says Hollingworth.
Also, lenders are only likely to agree to a payment holiday if they think your situation is temporary and a short break will give you enough breathing room to get back on your feet. “They would want to be sure it was the right thing to do because it will cost you more in the long run,” he adds.
Cancellation of life insurance premiums
It may be possible to reduce your life insurance cover or take a short break in your payments, without this affecting your cover – but only if your insurer agrees.
LV= allows this – but you can only qualify if your policy (for income protection, critical illness or life insurance) has been in force for a year or more, you have a good payment history and that you are less than three months behind with monthly payments. premiums. You must declare that you have suffered a significant drop in your income or that your usual income has ceased. Payment suspension will only be offered for one month at a time, up to three months.
You are not obligated to make up missed premiums and your coverage will remain in place for the entire period of payment interruption. Thereafter, your bounties will revert to your normal level and you will not be able to request another break thereafter.
Your insurer, if not LV=, may take a different approach. “If you’re having trouble keeping up with your premium payments, the first thing to do is contact your insurer to see what they might suggest,” says Malcolm Tarling of the Association of British Insurers. “They can follow LV=’s example and say, ‘We can stop your bonuses and you can have a bonus holiday for a specific period of time.’ Or they may say you can reduce your premiums but you’ll have to take a corresponding reduction in the amount of coverage you have.
AIG takes this second approach with customers who are experiencing financial difficulties. They will consider letting you reduce the monthly cost of your protection insurance for up to six months, but you won’t be able to take a full break from your payments. More importantly, during the period when you pay reduced premiums, the value of the coverage you receive will be reduced.
For example, it says a 33-year-old man with £250,000 of life cover, paying £21.86 a month, could reduce his payments to £4.17 a month for six months. However, the maximum that could be claimed during this six month period would only be £10,000.
In other words, in this scenario, an 80% reduction in the cost of the monthly policy would lead to a 96% reduction in the value of the cover and make your loved ones worse off by £240,000 if you died – while saving you just £17.69 per month. However, if £4.17 a month is all you can afford and you want to keep some sort of cover in place, this drastic step may be worth considering.
At the end of the six months, you can either keep your premium reduced or return it to your usual level, with no further underwriting required. You won’t be asked to cover the payment difference when your premiums return to normal, and for the full six-month period you’ll have access to AIG’s health and wellness assistance services 24/7 /7.
Reduce your pension contributions
You may also be considering reducing or stopping your pension contributions for a while. This may alleviate some of your short-term financial pressures, but it will reduce your retirement income.
“Staying in your pension and making regular contributions, if they’re affordable, is one of the best ways to protect your future,” says Eve Read, spokesperson for Nest, the nonprofit program set up by the government. to facilitate occupational pensions. “Especially if you’re saving into a company pension, like Nest, because your employer will be paying in cash, and you also get tax relief from the government – those extra contributions effectively double your investment.”
From April, the annual energy bill for an average household is expected to rise by £693 a year or £57.75 a month, according to Ofgem. If you are a basic rate taxpayer and you divert £57.75 per month from your pension contributions to your energy bill for a year, you will lose £14.45 in tax relief per month and £34.90 £ per month of employer contributions (assuming your employer contributes the minimum amount they can to your pension each month via automatic enrollment).
Cutting £693 a year from your pension will mean £1,284 less in your fund. If that money manages to grow by 5% a year until you retire, the long-term cost is even higher. Hargreaves Lansdown, an investment platform, estimates that a 40-year-old basic-rate taxpayer who cuts his pension payments in this way – cutting his contributions by just £57.75 a month for just one year – would end up £4,569 worse before age 67.
“It can be tempting to cut pension contributions when money is tight, but it’s important to remember that you’re losing more than your own contribution,” says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. “The tax relief and employer contribution give your pension a real boost and, together with long-term investment returns, can have a powerful impact on how much you’ll find back in retirement.
“If you find yourself in a position where you need to cut or stop your contributions, try to resume them as soon as possible.”