As the cost-of-living crisis deepens, you may be evaluating your regular monthly expenses and looking for things to reduce.
If you’re lucky enough to own a home, chances are your biggest monthly expense will be your mortgage. But will your lender allow you to cut your payments if you explain that you’re having trouble? And how does that affect your credit score?
If you have life insurance or an annuity, can you interrupt your payments and what will be the consequences?
Take a break from your mortgage
According to UK Finance, the trade association of banks, mortgage lenders should offer “forbearance” to any customer who is experiencing financial difficulties or is unable to make their mortgage payments.
This could take the form of an approved payment holiday, where your lender gives you permission not to pay your mortgage for a short period of time, usually up to three months. Alternatively, with your lender’s permission, you can reduce your monthly repayments.
There are costs associated with these arrangements. Any payment freeze will be noted in your credit bureau, which can affect your next loan request – for example, you may be charged higher interest rates. You are also expected to pay back anything you missed once you are no longer in financial trouble. Your mortgage is likely to cost you significantly more in the long run.
“The big downside to paying holidays is that you end up having to deal with a larger mortgage when you start making payments again,” says David Hollingworth of mortgage broker L&C.
Every day that you do not reduce the original amount you owe, interest will accrue on it. You also have to make up the missing payments.
That means “you end up paying a higher rate on the balance of the mortgage — because you have a larger mortgage,” says Hollingworth.
Additionally, lenders are only likely to agree to a payment holiday if they feel your situation is temporary and a short break will give you enough breathing room to get back on your feet. “You’d want to be sure it was the right thing because it’s going to cost you more money in the long run,” he adds.
Cancel life insurance premiums
It is possible to reduce your life insurance coverage or take a brief pause in payments without affecting your coverage – but only if your insurer agrees.
LV= allows this – but you can only benefit if your policy (for income protection, critical illness or life insurance) has been in effect for a year or more, you have a good payment history and are less than three months behind on monthly premium payments. You must declare that you have suffered a significant drop in income or that your usual income has ceased. The payment break is only offered for one month at a time, for up to three months.
You do not have to make up the missed contributions and your insurance cover remains in place throughout the payment interruption. After that, your rewards will return to your normal level and you will not be able to request another break after that.
Your insurer, if not LV=, may take a different approach. “If you’re having trouble keeping your premiums paid, the first thing you should do is contact your insurer to see what they can suggest,” says Malcolm Tarling of the Association of British Insurers. “You could follow LV=’s example and say, ‘We can stop your rewards and you can enjoy a reward vacation for a period of time.’ Or they can say that you can lower your premiums, but you would have to accept a corresponding reduction in the sum insured.”
AIG takes this second approach to clients who are in financial distress. It’s considering allowing you to reduce the monthly cost of your protection insurance for up to six months, but you won’t be able to pause your payments entirely. Most importantly, during the period that you are paying reduced premiums, the value of your cover will be reduced.
For example, it says that a 33-year-old with £250,000 life insurance who pays £21.86 a month could reduce his payments to £4.17 a month for six months. However, the maximum that could be claimed during that 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 result in a 96% reduction in the value of cover and leave your loved ones £240,000 worse off in the event of death – whilst saving you just £17.69 a month. However, if you can only afford £4.17 a month and want to keep some sort of coverage, then this drastic step might be worth considering.
At the end of the six months you can either stay at your reduced premium or increase it back to your usual level with no further subscription required. You will not be asked to pay the payment difference when your premiums return to normal, and you will have 24-hour access to AIG’s health and wellness support services for the six-month period.
Reduction of your pension contributions
You may also consider reducing or stopping your pension contributions for a while. This may ease some of your financial pressures in the short term, but will reduce your income in retirement.
“Staying in retirement and making regular contributions when they’re affordable is one of the best ways to secure your future,” says Eve Read, a spokeswoman for Nest, the government-created non-profit scheme to facilitate workplace pensions. “Especially when you’re saving for an occupational pension like Nest, since your employer is paying in, and you’re also getting tax breaks from the government – those extra contributions effectively double your investment.”
According to Ofgem, the average household’s annual energy bill is expected to increase by £693 a year, or £57.75 a month, from April. If you are a property taxpayer and divert £57.75 a month from your pension contributions to your energy bill for a year, you will lose £14.45 a month in tax relief and £34.90 a month in employer contributions (assuming your employer contributes the minimum each month contribute to your pension by automatically registering).
Deducting £693 a year from your pension means £1,284 less goes into your fund. If that money grows at 5% annually until retirement, the long-term cost is even greater. Hargreaves Lansdown, an investment platform, estimates that a 40-year-old property taxpayer who cuts his pension payments this way – by reducing his contributions by just £57.75 a month for just one year – would end up £4,569 worse off 67 years before fees.
“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, pension and retirement analyst at Hargreaves Lansdown. “Tax relief and the employer contribution give your retirement a real boost and, combined with long-term investment returns, can have a powerful impact on how much you have in retirement.
“If you find yourself in a position where you need to cut back or discontinue your posts, try to resume as soon as possible.”
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