As the UK’s cost of living crisis has continued into 2023, it is becoming harder for many households to manage their finances. Last year, around 8m people were in “financial trouble” or in “financial difficulty”. Fast forward six months, the figure has soared to nearly 11m.
Low and middle-income households are facing the most pressure, yet even middle-class households are feeling the pinch. This is particularly true as the terms on millions of fixed-rate mortgages come to an end, leaving homeowners with higher payments and a much harsher mortgage market than they did even a year or two ago.
Take the example of Iona and her husband. Both are architects in their mid-30s, their fixed-rate deal expired and their interest rate soared from 1.6% to 4.7%, causing their payments to rise by £500 per month to £1,700.
Given the economic climate, it is hardly surprising that more people are turning to “bad” debt (e.g. credit cards and personal loans). Yet it is important to manage debt wisely, especially during harder times. In this article, our Carlisle financial planners here at Vesta Wealth offer some ideas on how to do this.
Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
e: [email protected]
Adjust your budget
According to NIESR (the National Institute for Economic and Social Research), middle-income households are potentially facing a fall in real incomes between 6.2 – 13% in 2023-24. In monetary terms, the potential loss could be £1,077 per year.
The overall fall in living standards is expected despite financial support measures from the UK government totalling up to £900 for families on lower incomes. Wealthier households, however, will receive less of this state support.
Broadly speaking, costs are rising for households in three main areas: energy prices, food and running a home (e.g. the 1.7mn people on “tracker” mortgages). Therefore, it is likely worth taking a second look at your budget for 2023 and doing some contingency planning.
For instance, what would happen if costs in each of these three categories rose by, say, 10%? Could you still afford to sustain your lifestyle? If not, it may be time to explore ideas to generate additional income or cut discretionary spending.
Take an honest look at the mortgage
If you took out a new fixed-rate deal in 2022, then you may be shielded from potential rises in mortgage payments for the time being. However, when the deal expires (e.g. in 2 years), you may need to factor a harsher “interest rate landscape” into your future budget.
Hopefully, conditions will improve, but no one can be sure if/when that might happen. Crafting a plan now can help you prepare your finances for a potential rise in mortgage costs later.
For those coming up to the end of their fixed-rate deal in 2023, and for those on tracker mortgages (e.g. your bank’s standard variable rate, or SVR), it might be time to ask yourself – and our advisers – some questions.
Since December 2021, interest rates have risen 13 times in the UK, going up from a record low of 0.10% to 5.00% at the time of writing. By the end of 2023, the base rate could stand at 5.75%. Homeowners should take note and plan their mortgage costs accordingly.
For some, sadly, the only option will be to downsize to make ends meet. Others will still have space between their income and expenses to cope with a potential rise in mortgage costs. Speak with your financial adviser for maximum clarity on your financial options if you are concerned about your interest rate.
If you are retired and own your home outright, then you do not need to worry about potential rising mortgage costs affecting your monthly finances (except in specific scenarios – e.g. you own a property investment, like a buy to let).
Follow good practices with financial management
With many households facing a squeeze on their monthly budget, it may be difficult to build up 3-6 months’ worth of living costs for emergencies. Some may have dipped into their savings already to try and make up for a shortfall in spending power, due to rising inflation.
However, speak with your financial adviser about making it a priority to build an emergency fund. After all, if you lack short-term savings, then the temptation becomes greater to turn to credit if you face a large, sudden expense (e.g. a major home repair).
If you have multiple debts with high interest rates, consolidating them into a single loan or refinancing at a lower rate can be beneficial. This can make it easier to manage your repayments and could even lower your interest repayments (by refinancing at a lower rate).
Speak with an adviser to make sure you do not accumulate harsh associated fees or charges in the process. You can also discuss your options about the best way to prioritise repayments – e.g. based on interest rates or balances.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.