This year’s Christmas period will see almost one in three Britons slip into some form of debt to fund their holiday spending, according to an online survey on Christmas spending by YouGov. (pdf, 815 KB)

The online survey was conducted on behalf of Halifax and yielded some very interesting, if not alarming, results. According to the survey, the average person in the UK plans to spend nearly £38 on gifts for each loved one, with women planning to buy gifts for 10 people whereas men will give gifts to seven people on average.

Despite the financial crisis it seems that only 31% of the people surveyed have cut back on Christmas spending compared to previous years while 32% have increased their spending, with many of them going into debt to fuel their holiday purchases.

YouGov’s latest survey also found that more than 52% of the consumers do not save any money for their Christmas spending, while only 14% of the people surveyed said that they save money throughout the year to fund their Christmas spending.

Arguably the most alarming fact is that 31%, almost one in three, will go into debt to fund their Christmas spending, with 10% using their credit card to buy presents and planning to pay the money back later.

This year in particular more people than ever consider taking out a payday loan and 20% of all UK adults who plan to buy Christmas presents believe they will need to directly borrow money to pay for some of their purchases.

Rob Wood, Head of Halifax Savings, commented on the survey’s results: “It seems Christmas spending has not slowed down as we head into the holiday period and only a small number of people have felt the need to save throughout the year to cover the costs. It is encouraging, however, that most consumers will have the money [upfront] to cover the costs of Christmas presents. Christmas can be a tough time financially for families and advanced planning and saving is the best way to ensure there is enough money to go around for all the extra costs.”

Loan expert Tim Moss at MoneySupermarket.com also commented: “This year has been incredibly tough for consumers with the rising cost of living really hitting the nation’s wallets hard. It comes as no shock that such a high number of people will be tipped into debt this festive season, particularly as Christmas is a time when people generally increase their spending. With many people also being paid early in December, January payday may seem a long way off, so planning ahead is vital to avoid carrying over the debt burden into next year.”

Addressing the less financially secure people, Tim Moss added: “For the large number of people who are unable to save, there are a number of ways they can reduce the Christmas spending hangover by the New Year, and it is essential to use the right product to meet their needs. For example, a credit card offering zero per cent interest on purchases might be the sensible option if they are able to pay off the balance in full within the zero per cent period. Dipping into the unauthorised overdraft may prove costly for those unable to pay this off, particularly as the charges for dipping in the red may not hit until January.”

Payday loans are small, unsecured loans with sky-high interest rates, aimed at people who struggle to make ends meet each month until their payday.

Payday loans usually range from £300 to £1000 and since they are supposed to be short-term their interest rates can soar up to 30% or more for some providers. This translates into sky-high annual percentage rates (APR) of 3,000%, 4,000% or more!

3.5 million Britons are considering taking out a payday loan within the next six months, according to a recent research by insolvency trade body R3.

R3, also known as the Association of Business Recovery Professionals, “promotes best practice for professionals working with financially troubled individuals and businesses”. R3’s insolvency practitioners have been raising concern about payday loans and a new kind of “zombie” debtors who only pay the interest charges on their debt and not the debt itself.

R3 president Frances Coulson commented on the issue of payday loans voicing his concerns:
“Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.”

“We hear talk of ‘zombie’ businesses, but seeing individuals run their finances in the same way is troubling. ‘Hanging on’ each month simply cannot be maintained forever. This group will have very few options should interest rates rise or their circumstances change.”

“Having a financial buffer is crucial to weathering periods of difficulty. If struggling to payday becomes a regular occurrence, seeking financial advice should be a priority over short term high interest credit. ”

Of the 2,000 people interviewed by R3, 45% struggle to make their money last until their payday while 60% of those who had taken a payday loan have already regretted the decision. Moreover, 48% claim the payday loan had negative impact on their financial situation and only 13% believe their payday loan impacted positively on their finances.

According to house equity withdrawal (HEW) data released by the bank of England on Wednesday, households are paying back a record amount on their mortgage.

During the second quarter of 2011 alone, consumers paid back £9.1bn on their mortgages, amounting to 3.5% (-3.5% of HEW) of their post-tax income. This is the largest figure ever paid back in a three-month period since the Bank of England started collecting data.

To put these figures in perspective; in late 2006, house equity withdrawal had peaked at 5.6% of post-tax income, as compared to -3.5% from April to June of 2011. Simply put, house owners were remortgaging their properties a lot more before the recession.

Today, as home owners are cutting back on spending and house prices continue to fall, remortgaging does not have the appeal it had during the “boom” years. Since June of 2008 a grand total of £92.9bn has been paid back instead of being spent by home owners.

An article by Kate Reinold of the Bank’s structural economic analysis division (.pdf, 70 MB) published with the 2011 Q2 Quarterly Bulletin explained that the fall in HEW since the recession is “likely to reflect a fall in the number of housing transactions, with little sign that households in aggregate are making an active effort to pay down debt more quickly than in the past.”

IHS expert Howard Archer said: “The record net injection of housing equity in the second quarter points to a strong desire and perceived need of many people to improve their personal financial balance sheets given high debt levels and serious concerns over the economic situation and jobs.”

“Furthermore, extremely low savings interest rates have made it much more attractive for many people to use any spare funds that they have to reduce their mortgages. In particular, many people may be using the extra money that is resulting from their very low mortgage interest payments to reduce the balance that they still owe on their houses.”

Just imagine. You’ve been to the show house, fallen in love with the housing development and signed up to buy a house off plan for £500,000 and paid the 10% deposit. The only problem you may have thought was that you’d have to wait 12 months to move in.

Ten months later the letter arrives to say that the house will be ready in 8 weeks. But things have changed. House prices have fallen and the building society values the house at £425,000 and, as business is not so good, your income has fallen too.

What do you think the building society will say? Yes, you guessed it – no mortgage! But you have signed a contract to pay the balance of £450,000 for your new home and the builder wants his money and you’ve signed a legal contract to pay.

This sort of situation does happen. Berkeley Homes is in the process of taking an unknown number of it’s clients to court to recover the money they are owed.

So please be very cautious if you are tempted to buy a home off plan especially if you are having to raise a hefty mortgage to complete the deal. And also be aware that, despite the recent upswing in house prices, some commentators are still forecasting that house prices will go into reverse again next year.

Please be careful.

Over 100,000 people have attempted to get credit card debts and loans cleared off by using legal loopholes – but now a Judge’s decision seems to have closed the door for them.

The people owing the money have been trying to get their debts declared “unenforceable” because, for example, a credit agreement was worded incorrectly or could not be produced. But now a judge in the Commercial Court has ruled that even when an agreement is found to be “unenforceable”, this does not mean that a borrower was no longer liable for the debt.

Consequently, the borrower is not entitled to have their credit record wiped clean and the lenders still have the right to appoint debt collectors to recover payment.

A spokesperson for the lending industry said, “Some borrowers took out loans fully understanding what they were doing and properly borrowed the money. They have been trying to get the loans written off by using a technicality and that’s a cynical practice”.

We agree.

Our tip for today is pay this months’ credit card and utility bills either online, by phone, at the post office or at you bank. Why? Because the regional postal strikes are extensively delaying postal deliveries and it’s set to become much worse.

If you usually pay your bills by post, there’s a strong possibility that your payment will arrive late. That means that your credit cards will charge you a late payment fee and that late payment will find its way onto your credit rating. So you face a two way hit.

Local postal strikes have been happening since June but a national strike is now on the cards after the Communication Workers Union balloted its members on strike action over conditions and pay.

The Northern Rock has already admitted that it costs about £25 a month to administer a mortgage that is in arrears so why do many other lenders continue to charge up to £115 a month for those in arrears? Is it punishment or profit? You decide!

And this problem is not small – the figures are huge. Figures from the Council of Mortgage Lenders show that there were 399,000 accounts in arrears at the end of last March. That means that they are charging nearly £46 million each month in arrears charges when the true cost is just under £10 million.

If the homeowner has equity in their house then these charges don’t seem to matter to the lenders as they will get their money back as and when the property is sold. So they don’t spare the horses on any other charge either. Say for example, you want a debt councillor from your lender to come around to see you – that’ll be another £100 please! And if the lender has to repossess and sell your property your eyes will water when you see what they typically charge for estate agents fees – we’ve heard of 5% of the sale value. Who would dream of paying an estate agent 5% when the market norm is 1.5% at the most?

And if the lender has had to change the locks then a pair of locks on the front and back doors will typically cost £400 plus a further “management handling fee” of £50.

It seems all wrong to us. People who have their backs to the financial wall should not be preyed upon. Yes they should pay the costs incurred in sorting the situation out but what we are hearing of amounts to out and out profiteering on the most vulnerable.

It must be stamped out!

A recent survey has confirmed that homeowners with debt problems are increasingly trying to borrow themselves out of trouble.

During the last year, consumers have increased their unsecured debt to an average of 194% of their net take home pay. This is despite falling house prices and increasing negative equity. Last year, it was “only” 170%.

In contrast, those debtors who do not own their own homes have been far more prudent. Their level of debt hardly changed over the last year.

This demonstrates that homeowners still feel that owning property allows them to fund a higher lifestyle through debt and it will take time for it to sink in that this is no longer true.

Experts are warning that a second wave of house repossessions could hit the country. Whilst repossessions were down 10% on the previous quarter, the outlook continues to look bleak.

Industry figures have revealed that the number of households in serious arrears has rocketed by almost 50% during the last 12 months. Against this background, the Government has been applying pressure on lenders to go softly on those behind with their payments. This to some extent has suited the lenders as house prices have dropped up to 335 in some areas and they want prices to recover somewhat before they take action.

This situation has led Shelter, the housing charity, to warn that as interest rates, house prices and unemployment rise, we could see the second wave of repossessions.

Currently 2.5% of households are significantly behind with their repayments – some 205,600 homeowners. It is this group which is most at risk as they could be taken to court at any time. But the Council of Mortgage Lenders insists that it’s members are doing everything they can to help those in arrears.

If you go into an Individual Voluntary Arrangement, the Insolvency Practitioner running your IVA scheme takes his fees from the first set of payments you make. But if you are one of the one in five who fails to keep their payments up, you will find yourself with a bill from your Insolvency Practitioner for the balance of the fees you owe.

IVA’s run for five years during which time, the person in the IVA pays off the reduced debts which were negotiated for them by the Insolvency Practitioner and within this sum the Practitioner includes his fees. This frequently means that the creditors have to write off 60% of the money owed to them.

But if the IVA collapses because the creditor fails to maintain the agreed payments, what happens next? Well, in practice, the only solution is a full bankruptcy. If that happens, the bill from the Insolvency Practitioner gets added to all the other unsecured creditors – in other words, he’s likely to get very little - or nothing!

The start of a new fast track bankruptcy regime has been hampered by regulations that were added at the last moment.

The problem is that just before launch, the Insolvency Service announced that people with pension savings would not qualify for a Debt Relief Order. This has meant that in the first three months the number of DRO’s has barely reached 2,000 against the forecasts of between 3,500 and 5,000.

A spokesman for the Citizens Advice Service confirmed that the pensions issue does exclude many people who otherwise would qualify for a DRO rather than a full bankruptcy.

At the moment a person living in England or Wales has to have less than £300 in assets, excluding their car which must be worth less than £1,000. Because pension funds are not readily realisable it was assumed that they could be disregarded but shortly before the DRO’s came into existence, it was announced that they too were to be included.

To qualify for a DRO you have to have not more than £15,000 in debts and your disposable income after tax and household bills must not exceed £50 a month. The DRO is then organised by an official provider and has to receive authorisation from the Official Receiver. The DRO then normally lasts twelve months.

A report out from the charity the Money Advice Trust has urged Debt Managers to be more transparent about their fees.

Debt Management companies are hired by those in debt to renegotiate the amount they owe and organise an achievable repayment plan. But the report from the charity claims that clients are often not told about the fees they incur until very late in the renegotiation process. The report also says that some Managers don’t make it clear that in addition to a scheme set up charge, monthly fees also have to be included within the clients’ payments.

This seems a little strange to us. If a person appoints a Debt Management company to sort out their financial affairs do they think that the service is free? Most schemes last up to 5 years and do they expect the company to run their scheme for that time for nothing? Clients must expect charges and be told clearly what they are but the client should remember that usually, these charges are included within their single monthly payment. As such they know what they are paying in total.

Having said that, we are supporters of transparency in all financial matters whether it be debt, loans, mortgages, insurance, credit cards etc. People work hard for their money and have a right to know who is charging for what and on what terms.

Sale and lease back arrangements are where the homeowner sells their house to a third party at a knock down price and then rents it back. It’s been one of the options people have had when they are in financial difficulties but are desperate to remain living in their house.

One of the problems has been that some unscrupulous landlords have thrown their tenants out after the first year and then gone on to sell the property at a healthy profit. The Financial Service Authority which now regulates these deals has already said that such actions are unfair.

Last week the Birmingham County Court backed up the FSA’s view. The Court said that a couple from Shropshire could remain in their house even though the company they had sold it to had stopped paying the mortgage. In fact the judge said that they could remain in the house for life by either renting from the mortgage company that had repossessed the house or buy it back.

Whilst this shows the way the English courts are thinking, the judgement in Birmingham doesn’t represent a legal precedent. Precedents can only be made in the High Court.

So if you are court in a similar position, before you take ant action, talk to the experts at the Citizens Advice Bureau to see whether they agree that you have been treated unfairly.

Mortgage lenders now believe that 1 in 10 borrowers owe more on their mortgage than their house is worth. But the position does vary depending upon which area of the country you look at. For example, the East Midlands is particularly bad in cities like Northampton, Derby and Nottingham with up to 23.6% of borrowers facing negative equity.

Whilst we have seen growth in house prices over recent months, commentators are warning that the worst may not be behind us. We warned about this very point last month and we still believe that the green shoots of the housing recovery will die back. If housing prices do go into reverse again, the curse of negative equity could easily hit 1 in 3 borrowers.

This is very worrying, not just for those afflicted because many more of them will end up in default and subsequent repossession but also for the housing market at large.

Negative equity prevents people moving home because they cannot afford to buy another home if they sell. This means that the supply of homes to estate agents is restricted and, somewhat perversely, this tends to push prices up. Then as the supply of houses increases again, unless mortgage financing becomes easier, prices edge back again.

If you are in negative equity, don’t panic. Negative equity is only a problem if you have to move or remortgage. Your best bet is to ride out the storm – this may take time but for many it’s the only option.

As the banks tighten their credit criteria are and more people are being refused any form of credit. That goes for loans, mortgages and credit cards.

According to Datamonitor, by the end of 2009 some 9 million people will be unable to raise credit from Britain’s banks. That’s 1 in 7 people.

On top of this, the companies that only two years ago were lending to those with poorer credit histories are falling like flies. London & Scottish went bump before Xmas, Benefitial Finance closed last month and Cattles appears to be teetering on the brink. That leaves just a few companies such as Provident Financial operating.

But don’t rush to Provident. They operate through agents going door to door collecting weekly instalments and their interest rates are eye watering. What would you guess their typical interest rate is? 25%? 30%? Could it be 40%? No it’s a mere 100%!

For some the only other option is what’s called a “pay-day loan”. That’s a loan given to workers to tide them over until they receive their next pay cheque.
A typical charge fort this service is £25 for a £100 loan. And that works out at an annual interest rate of 2000%. So perhaps we should consider Provident as a bargain!

These interest rates look morally wrong to us. We think that the Government will have to set up an enquiry into what is happening to see whether these interest rates are giving rise to excess profits – and if they are, they’ll have to set a cap the maximum interest rate and charges.

At last the Government has decided to ban credit cards from posting out unsolicited cheques. The credit card companies will also be banned from increasing interest rates without warning and forced to raise the minimum monthly payment.

Last year over 14 million promotional cheques were sent out by credit cards. The technique of sending out these un-requested cheques has proved to be highly profitable for the credit card companies. The interest charged on the money was usually higher than the rates on the card. And then there were usually handling fees of up to 2.5%. Not cheap! As a result many consumers have been led into excessive debt and it was clear that this practice would have to stop at some time.

These reforms were published in a White Paper last week. But that wasn’t all. There is going to be a crackdown on illegal loan sharks and plans for an advocate who will fight on behalf of those consumers who have been cheated by financial businesses. Finally, a specialist enforcement team is to be formed to focus on online fraudsters.

To us this is all good news. Let’s hope that the proposals in the White paper are implemented without further delay.

There’s a new ploy to exploit legal loopholes and get debt wiped off.

It’s a debt transfer scheme whereby the debtor pays a fee and transfers the debt to a claims firm through an agent. The debtor is then supposed to be debt free. The firm effectively gabbles that it will be able to get the debt cancelled.

The problem is that there are concerns that the debt transfer may not be legally watertight. If that is the case the debtor will have ended up paying a fee and still be saddled with the debt. Not very satisfactory if you are the debtor!

If you are in debt and are offered one of these schemes, take care. Look closely into the paperwork and get some form of guarantee that your creditors cannot still come back to you.

Better still don’t get into a financial mess and pay your debts!

Landlords financing their properties on buy-to-let mortgages are 3 times more likely to default on their mortgage payments than normal borrowers. This has led to a spate of repossessions.

Between January and March this year, 4,100 buy-to-let properties have been taken back by the lenders. 1,700 were repossessed and 2,400 were transferred to “receivers of rent” who then took over the running of the properties.

Few tenants would be aware that their landlords were in financial trouble, so often, the first sign of a problem is when the bailiff comes knocking and they discover that the property is about to be repossessed.

So now the Government is proposing to bring in laws to protect tenants. But an existing law helps them if they are part way through a tenancy agreement. It’s called the Law of property Act 1925. Under this legislation, the lender can appoint a receiver of rents to take the property from the borrower. These receivers are often insolvency practitioners or chartered surveyors and operate independently from the lender and the borrower. But it is up to the lender to decide whether to apply for repossession or appoint a receiver of rents.

If you are a tenant and are up to date with your rent, the law says that you have the right to remain in the property until the end of your tenancy agreement. If you are not up to date, then you have effectively broken the agreement and you can be evicted.

A problem sometimes arises when the lender is not aware that the borrower had rented their property out. In this situation, the tenancy agreement is not normally binding on the lender. The lender will consider the agreement as fraud on the borrower’s part and therefore the tenancy agreement becomes void. In those situations the lender can decide whether to opt for immediate repossession or go down the receiver of rents route. In today’s difficult property market some lenders prefer to keep the rental going and hold the property until the housing market improves.

If you are a tenant and know that your landlord is in financial trouble, you should consult your solicitor.

The Financial Ombudsman Service (FOS) is now receiving three times as many complaints about debt collectors as in the last twelve months. The complaints are usually about relentless hounding and harassment.

But, say the FOS, when they get involved matters usually get resolved very quickly. As soon as the debt collector knows that the spotlight is on them, it remarkably focuses their mind.

So if you are being harasses for a debt that’s not yours and have done all in your power to explain that, here are some tips:

• Contact the company that employed the debt collector that you are being harassed. Under the guidelines laid down by the Office of Fair Trading, the business that employs the debt collector can be held responsible for its behaviour.
• If you are being harasses, phone the local office of the Trading Standards. And if you are threatened, contact the police straight away.
• You should not be contacted at unreasonable hours. So take a note of the times you’re called, what is said, and the language they use.
• It is illegal for them to ask you to call them back on premium rate phone numbers.
• If you have already settled the debt, the debt collector must check that out. They cannot make unjustified payment demands.
• And if, despite everything, the debt collector continues to hound you, write to the FOS.

The housing charity “Shelter”, says lenders are not following agreed guidelines aimed at limiting repossessions.

Last year a “pre-action protocol” was agreed which laid out the ways lenders should assist borrowers before starting repossession proceedings. But it seems that as the guidelines are just that – guidelines not imbedded in law, they are being ignored by the lenders and some courts.

In Shelter’s survey which was run in conjunction with The Citizens Advice Bureau and National Debtline, it was found that just less than a half of mainstream lenders were observing the pre-action protocol. The very worst were the sub-prime lenders lending to people with impaired credit ratings. Here only one fifth were observing the protocol.

Shelter said, “These people are already the most vulnerable and should be the borrowers most seeking the protection of the protocol”.

But it is not only the lenders who are at fault, the courts also come in for critism. Three out of every four Judges were asking the lenders for more information about the efforts they had undertaken to sort out the borrower’s financial problems. But despite that, repossessions had increased by 23% beteen the last quarter of 2008 and the first quarter of 2009.