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Last Updated: Wednesday, 21 September 2005, 13:36 GMT 14:36 UK
Coping with interest rate changes
Ray Boulger, Francis Klonowski and Anna Bowes

Three financial experts explain what consumers should do when the Bank of England moves interest rates.

Lower rates are good news for mortgage holders but not savers.

On the other hand, higher rates are bad for mortgage holders and good for savers.

Ray Boulger, senior technical manager at Charcol

Switch from a variable rate mortgage deal

If you are on a standard variable rate and you haven't got redemption penalties - a fee charged by the lender when a loan is paid off early - then switch your mortgage to a cheaper deal.

You can find out if you have redemption penalties by checking your mortgage offer, or simply contact your lender and ask.

Check your mortgage to see if it has an overpayment facility
Ray Boulger

If you have made the decision to change to a better deal, check with your lender to see what they are prepared to offer you and then see what else is on offer in the market.

Look at the cost of switching along with the interest rate you are going to be paying.

If you have a large mortgage, getting the best rate will probably outweigh free legal costs and a free valuation.

If you have a smaller mortgage it will probably be best if you go for a mortgage that offers a free valuation - if not free legal fees.

Before you look at the rate you need to decide if you want another variable, a tracker, discount or capped rate deal.

This can be a big way to save money.

Someone who switched from a standard variable rate of 6.5% to a two year tracker at 4.5%, for example, could save 167 a month on a 100,000 repayment mortgage.

Overpay your mortgage to reduce impact of future rate rises

If you can afford to make overpayments on your mortgage this is worthwhile, providing you don't have more expensive debt, such as credit cards which charge double digit interest. These should be paid off first.

By overpaying you can save interest payments in the future and secondly protect yourself for any further rises.

Check your mortgage to see if it has an overpayment facility.

A homeowner with a 100,000 mortgage paying a typical standard variable rate would save about 50 a month by overpaying 10,000 in a one-off lump-sum.

Francis Klonowski, Leeds-based certified financial planner

Don't be swayed by the short-term economic environment.

My number one tip is that people should not be swayed by the short-term economic environment.

About three years ago investors were rushing to sell their share-based investments because the market was dropping. Now they are wondering what they should do about their debts and loans - and all their original financial planning is forgotten in the process.

People tend to panic, and forget some basic investment principles
Francis Klonowski

Instead of focusing on what they were originally planning for, they forget about it because their attention is distracted by what is happening in the markets or with interest rates.

They forget that the original balance of investments should still be there, for example, an investment mix they may have planned consisting of bonds, fixed interest and cash.

People tend to panic, and forget some basic investment principles.

It is important for investors to remember that they should have enough in cash and cash-type holdings for people to meet their immediate needs and emergencies over the next couple of years.

For example, you should have about six months of income in cash which should cover most emergencies, although you might need a bit more depending on your circumstances.

Until you have built up your cash reserves, you should not be saving in stocks and shares; otherwise you may end up having to sell at the wrong time to meet some emergency or crisis.

Using long term savings for short term emergencies is a major no, no.

Pay off your debts early

Pay off your debts before increasing your savings, but don't leave yourself too short of cash reserves.

Try to get the right balance between debt reduction and savings. I would identify what disposable money I had each month, and divide it equally between the two.

If you already have the capital, you still need to maintain a balance. By all means reduce the debt, but remember to leave yourself with some liquid capital in case emergencies rise - you don't want to end up borrowing more.

National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK. Tel: 0207 833 2181

If you are earning money and have big debts it may not be worth over committing yourself in savings.

This is because the amount of savings income you can get is likely to be dwarfed by interest rates you are paying on your debts.

To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.

You should also factor in any tax that you may incur on your savings. Take for instance a sum of 10,000 generating 4.5% a year interest - 450.

For a basic rate taxpayer this is taxed at the savings rate of 20%, reducing the interest to 360 - 3.6% a year.

For a higher-rate taxpayer, the interest reduces to 270 - or 2.7% a year. Build in inflation at just under 3%, and you can find that the value of your money is actually reducing in real terms.

If you are a taxpayer the best way to save is through a mini-Cash Isa, as you can save up to 3,000 tax-free each year.

These basic calculations aside, I think paying off your debts can be a big psychological boost.

If you have ever met someone free of a mortgage at an early stage in their life, they'll tell you how wonderful it feels.

Anna Bowes, Independent Financial Adviser, Chase de Vere:

Become a rate tart

Do not let inertia get the better of you. Your bank or building society is not going to reward you with loyalty.

Try to calculate how much more interest you may earn over the course of a year by switching provider, or ask your financial adviser.

Use your Isa allowance...if you don't use it you will lose it
Anna Bowes

You may think switching is not worth all the hassle and paperwork, so calculate if it is worth your while before you switch.

If you go ahead with the switch a good tip is to keep in contact with your providers to make sure everything goes right.

They should be geared up to dealing with this switches so there should not be a big problem.

One fact of life for savers is that there is always a great danger that the rate will change frequently, and could drop off the best buy tables.

Rates will always change and you will need to be an alert saver - or a 'rate tart' - and chase the best rate and switch whenever bonus rates fall away.

Alternatively, try and pick an account that has been consistent or an account with a guarantee for a set period of time.

If you go for a tracker account - which should mirror interest rate movements - watch out for dodgy trackers that fail to react straightaway to rate rises and pass on less than the base rate.

Don't waste your Isa allowance

Make sure you use your Individual Savings Account (Isa) allowance, a tax-free savings account, because if you do not use it you will lose it.

Remember the rule that you can't have both a maxi and mini-Isa in any one tax year, before you go ahead and invest.

If you want to invest in stocks and shares, you can invest up to 7,000 a year in a maxi-Isa.

The big advantage for savers is that these investments are free of income tax and capital gains tax and you do not need to declare them on you tax return.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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