On Monday 13th November 2017 a London newspaper reported the average British household will spend £686k on bills over a lifetime. That’s a lot of money! Even more worrisome is research findings by comparethemarkets.com, a leading website designed to save households money, concluded that a high percentage of the general public are unaware of hidden charges on their household bills.
The recent announcement that Bank of England’s base interest rate will rise, for the first time in ten years, is a cause for concern for many households. Families trying to keep on top of their finances may find it difficult when blindly paying hidden charges on their monthly bills. It could be suggested that households around the globe, not just the UK, need to be better informed about charges, rates, and terms with their energy providers and banks. Here are some key terms to be aware and vigilant of when shopping around for the best financial deal.
Interest rate refers to the amount that you are paying back over and above your original loan or bill. For example, you may have an interest rate 5%, put simply this means you will pay 5% of the original loan amount back over the lifetime of your loan. Why is an interest rate so important? It will give you an idea of how much extra you are paying to borrow money, also a starting point to compare other lenders with. Being better informed, allows you to make wiser financial decisions and choose the best and lowest rate option. A lower interest rate means less money paid out and more disposable household income. It could also be argued that being savvy about interest rates will avoid common exploitation of the general public.
Variable or Tracker Rates:
This refers to a mortgage’s terms and conditions, e.g., the way you will be charged interest. A variable rate means that interest charged is based on the central government’s bank rate and will vary at any given time. The variable rate is based on either the Bank of England (UK) or Central European Bank (Europe), or Federal Reserve (USA) rate, at the present moment. Every country’s central bank controls the interest rates of their economy and set rates for the ‘base.’ Lenders and banks then set a rate above the lender’s personal interest rate charge to borrow money. If your terms are ‘variable or tracked’ simply put, if a lender states an ‘interest rate 5% above the Bank of England’s base rate’ your interest payments will be the base rate at a present time plus 5% of it.
Why is it important? A central government’s base rate can jump at any given time. When and if the interest rate increases, you may find yourself with higher interest payments. You will need to be aware of what the base rate is, so you can judge how your payments could increase. That said, these base rates are subject to decline also as they have been in the UK for the last ten years. This is good news for homeowners! Bad news for savers with money in the bank, as the return is not so great when the rate is in a state of decline. This has meant low repayments for those on variable rate or tracker mortgages for a long time, with the risk of an increase of course. This is the main benefit of this kind of lending arrangement. However, it is only favourable when the economy is not in a boom, e.g., low rates for borrowing to encourage spending and economic growth in a country, designed to generate money from the general public as well as general taxes. When a country experiences an economic boom, the cost of living increases, as money floods the economy, rates will increase in line with this, and you’ll feel it!
This refers to the time that your offer or deal will last. If you have an interest rate deal, the rate will be fixed at that amount for a certain amount of time. Always check what the time frame is and when the rate will expire. Lastly, be clear on your new interest rate once the fixed term is over, so you can plan for the change in payments.
Interest only Mortgages:
Repayments made on these types of mortgages cover the interest only, not the amount borrowed. Traditionally these are appealing mortgages for low payments per month. However, do keep in mind that your repayments are not even touching the sides of your actual amount you are in debt by. A mortgage is traditionally twenty-five years; imagine twenty-five years of just paying interest until the end of the term. Once you hit twenty-five years, you will still have principal amount to repay… Yikes! Not a long-term arrangement over the lifetime of a mortgage that is attractive when this is understood in full.
Simply put, both your interest and debt (principal) are being repaid with each monthly payment.
Electricity is charged in Kwh (Kilowatts per hour). One Kwh is about 1,000 watts used steadily for one hour. The total usage is multiplied by how much you are paying per Kwh, e.g., 5 Kwh x 10p will tell you that your provider is charging you 10p per Kwh used in your house, and you have used five of them. Check with your energy provider to see what they charge per hour of Kwh usage, the lower, the better. Use this as a judgment when comparison shopping for the best provider.
Gas is charged pretty much the same way. However, the thing to be mindful of with gas providers is there are often ‘standing charges’ weekly or daily. This refers to an amount they charge for things like the meter being in your house in the first place! The lower the standing charge, the better, or none is the best. That said, balance this with what you are charged for the actual use of gas, then use this as a judgment on the best provider, e.g., standing charge (if any) + amount charged for gas usage.
There are many ways to ensure you obtain the best deal or promotion for utilities and interest rates. A good place to start is ‘compare the market’ website. This website allows you to find the cheapest deal by adding your personal details: The area you live, size of your home, and type of energy you use. Many of these sites also cover loans, mobile phone contracts, and insurance policies. Google is your friend. Search online for ‘compare the market’ and ‘compare energy deals’ to find a website in your country that offer this free valuable cost-saving service. Note, that once you have found a good deal, it can be worthwhile heading to the provider’s own website to cross-check information and obtain a quote there as well. You might be lucky enough to find a better deal directly and leave your household with more disposable income in the long run.