Credit cards and wealth warnings...
"TOUGH new action by the Government and lenders to tackle growing credit card debt will put homes at risk of repossession as companies seek to get their money back" (Times, 24 October 2005) .
Debt advisers are now warning that the promotion of loans and credit cards should carry health warnings that homes may be at risk if repayments are missed.
Big lenders, including many of the high-street banks, are embarking with Government help on a much tougher strategy to tackle Britain’s trillion-pound debt burden. “The Government is committed to tackling over-indebtedness and addressing concerns about increased levels of consumer debt,” a Department for Constitutional Affairs paper outlining plans for stronger enforcement powers, said. Lenders are already taking a much tougher line, with court action to secure their debts against a debtor's house.
This involves the court issuing a 'charging order' which gives the bank the right to claim the debt from any money left over from the sale of your house, or even to apply to the court to have your assets, including your house, shares etc, sold to meet the debt. The number of charging orders has jumped from 13,000 in 1999 to 45,000 last year.
At present the order can only be made if a debtor has failed to meet two consecutive payments of an agreed plan to pay off the debt.
Now the Department for Constitutional Affairs is proposing to make it even easier for the banks, credit card firms and major stores to repossess debtors’ homes. The department is planning legislation to allow charging orders to be made even against those who are keeping up the agreed payments.
SIPPS and second homes...The Government changes its mind!
From April 2006 the rules that apply to UK Self Invested Pension Plans (SIPPS) will be relaxed to allow a much wider range of investments. But the widely heralded plan to allow residential property has been scrapped. Many people, especially those keen to sell you properties or property investments, saw this as an opportunity that looked almost too good to be true! You will have seen adverts and articles explaining how the taxman will subsidise the purchase of a holiday home in Spain or Devon. This has gave rise to concerns about the effect that the expected increase in demand for second homes would have on house prices, making it even more difficult for first-time buyers. All that has gone, although the common sense points we made before still apply. We will leave them unchanged for you to think about!
If you have, or are planning to have, a SIPP then the first thing to remember is that it is intended to provide you with a pension, and that the investments you make within the plan should be decided on that basis only. Residential property is not a liquid asset. Changing a house of flat into cash can take quite a while and a fair amount in fees. The yields on buy-to-let properties are not very good and any increase in prices brought about by this change will depress yields still further. Most people already have a large part of their total wealth tied up in residential property by virtue of the houses they live in, and further exposure to this asset class is not a good idea. Property investment is hard to diversify (you've got a lot of eggs in one basket) and anything that affects prices locally can damage your returns even if property as a whole is doing well. Read our sections on asset allocation, property, and our topic on house prices, and think long and hard before rushing to buy!
Store card mis-selling: Which? demands action...
Which? (formerly the Consumer Association) accused the competition watchdog of failing to protect consumers who borrow on store cards, by continuing to allow mis-selling on the part of many well-known high street stores. The Competition Commission yesterday published the findings of its 18-month investigation, but has so far failed to introduce a basic code of conduct for lenders.
We have already highlighted the scandalous cost of store cards in our section on borrowing. Despite the fact that the APRs on store cards range from 14% (John Lewis/Waitrose) to almost 30% (Debenhams, B&Q, Top Shop, Miss Selfridge), out of the 14 million cards in active circulation more than half are not paid off in full each month and continue to accrue interest charges which can often eventually exceed the cost of the goods originally bought. Read the report here (in PDF format).
Protection Racket? Debt insurance to be investigated...
Citizens Advice calls for OFT investigation into payment protection insurance.
Payment protection insurance is failing many of those who need it most, adding to their debts instead of protecting them against hard times, a new report from national charity Citizens Advice says today.
The report – published at the start of Advice Week 2005 - says the insurance sold to cover credit payments in the event of illness or job loss is often very expensive, mis-sold to people who cannot possibly claim on it, and designed to exclude many of the most common situations that can lead to debt problems. Read full report here. See our page on borrowing here.
Property: buy-to-let, minimum investment £1 ...
One of the problems with property investment is that properties are not easily shared amongst several investors, and a sensible amount of diversification can be impossible for most private investors to achieve. A new internet-based exchange, Opromark, is designed to give retail investors the ability to buy and sell shares in buy-to-let properties. With the tax benefits of being able to include residential property in self-invested personal pensions from April next year, buy-to-let is expected to increase in popularity, and Opromark is clearly intended to address the requirements of smaller investors. That's the good news.
The bad news is that most small investors already have a large exposure to property through their own home, and increasing their exposure to this asset class might be unwise. In addition, the expenses associated with this venture seem to be high; it may prove very difficult to sell shares, especially if Opromark fails; and the management of residential lets can be problematic and expensive.
Whilst the basic thinking behind Opromark has to be applauded, potential investors need to be aware of the pitfalls and do plenty of homework before parting with their money. Read our section on property here.
The newspapers are full of adverts from banks and building societies giving new interest rates for savings accounts following the recent reduction in base-rate by the Bank of England. In many cases, the new rates reflect a larger reduction than the 0.25% drop in the base-rate. Savers should always be vigilant in comparing the rates that apply to their accounts, and especially vigilant when there has been a change in base-rates. Very often banks and building societies use it as an opportunity to make higher profits by failing to pass on to savers or borrowers the full benefit of any changes in base-rate. Keep shopping around! Read more on saving and borrowing.
Investment Holy Grail
Have you read this topic yet? Don't miss it: read it here.