Deliver your clients from temptation

Some UK retailers have been forced into an unprecedented frenzy of price cutting in a frantic bid to encourage us to spend our cash before Christmas.

Many leading department stores are holding one-day promotions of 20% off and ‘three for two’ offers on gifts. The recent VAT cut pales into insignificance compared with these price reductions.

Last week a red campaign banner in Reading proclaiming ‘Nationalise Woolworths’ summed up the pain of economic conditions.

Just two years ago Britons were skipping off for Christmas shopping trips to New York to benefit from exchange rates of more than two dollars to the pound.

The boot is now on the other foot, with overseas visitors coming here to enjoy an exchange rate of 1.2 and $1.5 to the pound.

Despite the government’s need for consumer spending to tackle the recession, members of the public must save an emergency capital base and lower their mortgage LTVs to reduce their risk ratings.

In short, they are facing the same dilemma as lenders. Base rate cuts may mean consumers have more access to cash, but many are reluctant to pass this on when it’s more beneficial to stash it in savings accounts.

We have been discussing with clients the practicalities of overpaying their mortgages if they have early repayment charge-free facilities.

Doing so could push their mortgages below lenders’ LTV thresholds when the time comes to remortgage, reducing their mortgage repayments and leading to better terms.

Borrowers with 25-year repayment mortgages of 150,000 on tracker pay rates of 5% would have been paying around 877 per month before November’s 1.5% base rate cut. It requires willpower but if the extra 127 available to them every month after the cut is overpaid into their mortgages, assuming rates are broadly the same over the term, their deals could be paid off in 19 years and nine months instead of 25 years.

Of course, given the prevailing risk of redundancy, borrowers could be forgiven for stashing their cash instead of overpaying.

But it’s worth finding out if the lenders concerned will allow clients to borrow back at the same rate as their original mortgage – as is the case with Northern Rock – because overpaid cash can work as an offset facility.

It will always be there in case clients need to take a payment holiday for a few months or borrow money in an emergency.

Many borrowers don’t know how easy it is to overpay. With most lenders you simply write yourself a cheque with the mortgage account number and ‘capital reduction’ written on the back, then post it to them.

If customers can afford to protect themselves by saving, we can show them the benefits of not shopping with rate cuts.