Neil Shearing’s Internet Marketing Strategies

I’m not sure about the exact situation in the USA, but here in England the same story is everywhere… 1.4 million people will come off “cheap fixed rate” deals in 2008 and will be hit with their mortgage lender’s full variable rate… which is likely to be much higher than their fixed rate deal.

Coming off a fixed rate to a standard rate happens to everyone who has a fixed rate mortgage, that’s the whole point of it… you start out with the low rate but the mortgage lender actually makes their money in the long term when you pay the standard rate. When our fixed rate expired, we just asked our current lender to give us a better deal than their standard rate, or we would take out mortgage elsewhere. Guess what? They said, “OK” and knocked a full 1% off of their standard rate for our mortgage. We ended up paying I think 1% more than the discounted fixed rate, but 1% less than the standard rate. We were happy and the mortgage lender was happy.

(Actually, we were happy mainly because we’d paid off the vast majority of the mortgage during the 2-year fixed rate… and the new, higher, rate would only apply to the “rump” of the mortgage we had left.)

The problem now is that when it comes time to switch to the standard rate, mortgage lenders supposedly won’t be so likely to “cut a deal” with the mortgage holder because taking your mortgage elsewhere has become more expensive… rate have jumped and so have application fees… as lender’s tighten their belts.

Well, that’s the theory and supposedly it was even behind the Bank Of England’s decision to cut rates earlier last week… easing the transition from fixed rate to standard rate. Cliff D’arcy says that “in April 2001, when the base rate was the same as today’s 5.50%, Halifax’s SVR was 6.50%. After yesterday’s cut, Halifax now has an SVR of 7.50% — a full percentage point higher than 6½ years ago!”, and that, “mortgage arrangement fees have almost doubled in the past two years.”

Well, I don’t believe it’s as bad as it’s painted.

Just a little research at fool.co.uk shows us some cheap mortgage lenders still exist. For example…

Darlington 2.13% discount :
5.69% Until 30/04/10 :
Arrangement Fee: £474

Hanley Economic Fixed :
5.59% to 28/02/11:
Arrangement Fee: £649

Those are still decent deals which you can use to justify asking your current lender to match or come close to when your fixed rate deal is about to expire. After all, they will want to keep your business, just as my lender did.

update from the ThisIsMoney website…

“Ray Boulger at broker John Charcol in central London says borrowers should not panic. ‘Only those with adverse credit are having difficulty remortgaging to a competitive deal,’ he says.

‘That’s not to say the market won’t be tougher next year. All borrowers coming off special deals should brace themselves to pay more. But there will still be plenty of good fixed and tracker deals available.’

Borrowers coming to the end of a mortgage deal in the first half of 2008 should start thinking now about their next move. It is vital for homeowners, particularly those with credit problems, to act early and get advice from an independent broker who can search the whole of the mortgage market for new loans.

David Hollingworth at independent broker London & Country Mortgages in Bath, Somerset, suggests talking to your present lender first, as this will give you something to compare new mortgage offers against.

‘If it can offer you a reasonable deal it is worth considering, particularly as staying means there won’t be any need for a new valuation of your property or credit checks,’ he says.

‘But the majority of borrowers should not have any difficulty switching to any deal in the market if they want to take advantage of the best rates.’

Most mortgage deals can be reserved for up to three months and some for up to six months. But Boulger says: ‘ Borrowers who want fixed rates and can afford to wait could get a better deal if interest rates are cut again in the first few months of next year.”

They seem to agree with me. For most people there shouldn’t be much of a problem. Of course you’ll be paying more… your discounted rate ended… but it shouldn’t mean a financial crisis.

This is one of my infrequent “real life money” posts. Today, in the Telegraph online we have this claim…

“Home repossessions are expected to soar after the Bank of England took the shock decision yesterday to raise interest rates by a quarter of a point to 5.25 per cent.”

Oh, C’mon now! A 0.25% increase in the Bank of England base rate, slightly earlier than expected (and it was expected to happen in February) and suddenly we are hearing that repossessions will “soar”.

If people are tipped over the edge by a 0.25% increase in their mortgage interest rate, they really should get a better grasp of money. I mean, a lot of people who took out mortgages in the last two years will be on highly discounted rates, so they are paying less for their loan than most people. Anyone who’s discounted rate has expired (usually after 2 or 3 years) will have got used to their monthly payments and should be able to cope with the 0.25% change.

On a £100,000 mortgage (roughly $200,000), an increase from 7% to 7.25% (standard rates, which are to be avoided anyway by shopping around for a better deal) the monthly increase is £16 (roughly $30).

Who’s financial position is that increase going to ruin?

Lots, if we believe the Telegraph and there are to be “soaring” repossessions!

If you really want to see how “soaring repossessions” happen, check out this PDF from the Bank of England and see the graph on page two. You’ll see interest rates rocketing, causing huge pain and housing market slumps. In 1990, rates were as high as 15% having climbed from under 8% in 1987. In the last five years they’ve change from around a low of 3.75% to a high of 5.25%.

I didn’t own a house in 1990, but my parents did, and I remember it well.

Perhaps that’s one reason why I’m keen to pay off my mortgage so quickly… and I mean quickly… by September.

In this post I get to pull together two of my favourite themes… sneaky banks and Internet marketing.

If you’ve seen the ever-increasing hype surrounding new product launches in the Internet marketing world, you’d be forgiven for thinking that the “act now, or else” marketing tactic was only being used by the “guru” Internet marketers.

You’d be wrong.

I got an email this morning from my bank asking if I’d like to make a balance transfer at a special, *Christmas* offer where they waive the balance transfer fee (normally 3%)… and, get this, the offer expires at Midnight December 7th. That’s right, it’s a ONE DAY offer.

Here’s the email copy…

***
Do you want to be full of the festive spirit and enjoy the festive season without the financial strains it may bring? For a limited time only, you can now transfer a balance* WITHOUT a fee being charged!

Complete a balance transfer before midnight on 7th December 2006** using our online banking service and the balance transfer handling fees will be waived.
***

Wow. Is that an “Internet marketing” tactic you recognise? Act now, or else (the price goes up, the offer sells out, we withdraw the offer, the sky falls in).

And the “catch” is (as far as I can tell) it ISN’T a “zero percent” balance transfer… so presumably they’ll waive the transfer fee, but charge you interest from the day the transfer takes place at your current card rate.

Did you assume it was a “zero percent” balance transfer? Silly you!

Depending on the amount your transfer, how long you take to pay it off, and the rate of interest you’re paying at the moment, you may be better off ignoring this one-day offer and actually going for the “standard” zero percent for 12 months (with a 2% handling fee).

I actually got a zero percent deal for nine months without a transfer fee from the same bank about a year ago. I put their money on my mortgage and, before the deal expired, paid off the card thereby saving a small fortune in mortgage interest.

So, thanks for the 24-hour “Christmas” offer, but no thanks.

More information was published recently about the massive debt mountain the British have built up…

So far this year people have taken more money OUT of their houses through remortgaging than the houses have increased in value… which means people have LESS “disposable wealth” overall compared to this time last year.

“While house prices rose by 5pc from mid 2005 to mid 2006, this was dwarfed by a 15pc rise in mortgage advances as people increasingly used their homes as a cash machine, often to pay for holidays and cars. The effect has been to squeeze the real value of household wealth.”

So, sooner or later, this money has to be repaid. It won’t be eroded by high inflation because we are in a very low inflation environment, and with central banks being “hawkish” about inflation, that environment seems set to continue.

“Low interest rates have so far cushioned the effect of high debt loads. Even so, mortgage payments make up 24pc of pre-tax salaries, compared with 16.5pc a decade ago, according to Moneyfacts.”

So, if interest rates rise, people paying 24% of their current pre-tax salaries on their mortgage payment are in big trouble!

“Bank of England data shows that UK personal debt reached a record £1,250bn in September.”

Hmmm.

OK, so this just has to be coincidence, right?

“HSBC cuts lending as bad debts soar 36pc” 

and… “HSBC is the latest bank to be hit by soaring UK bad debts, underlining concerns that hundreds of thousands of Britons are struggling to cope with a spiralling debt burden.

The bank said bad debt charges in UK retail banking had jumped to £361m from £265m. Losses related to people applying for individual voluntary arrangements (IVAs) or going bankrupt made up 33pc of the total, compared with 22pc a year ago.

IVAs are an alternative to bankruptcy. They allow people to reorganise their debts and pay a set amount of money each month in return for creditors freezing interest payments. In May, Government figures showed that IVAs had soared by 142pc compared with the previous year.

HSBC group chairman Stephen Green said the bank had “deliberately reduced its market share” of new UK unsecured lending, though it still has a 10pc share. Last week, Alliance & Leicester reported a 60pc increase in bad debt charges and also scaled back its unsecured lending in the UK. Overall bad debt charges at HSBC rose 18pc to $3.89bn from $3.27bn (£1.75bn).”                  (Aug 1st 2006, same newspaper as quoted in this post)

You know, there’s real pain behind the “bad debt”… real people with big problems. Instead of piling on the debt, we should be shrinking it.

A while ago I mentioned that consumers were in debt. In Britain we owe 1.227 trillion pounds… (about $2.2 trillion, according to xe.com) that’s 1.015 trillion in secured debt (mortgages) and 211.6 billion in unsecured debt (credit cards, loans, overdrafts)… according to the Bank of England.

So, we’re in debt (up to our eyeballs). But who else is in debt?

Well, the government is in debt… either 500 billion (roughly), or a trillion depending on whether or not you include pension liabilities…

“With the net debt standing at £478.6bn and the pensions liability amounting to £530bn at the latest estimate last year, the decision (…to include liabilities…) would instantly catapult national debt above the £1,000bn mark. ” (source)

Oh, and don’t forget our companies…

“The public sector is not the only one with large deficits. The pension regulator’s first annual report, published yesterday, estimated that the UK’s top 350 listed companies have a combined deficit of between £250bn and £350bn.” (source)

So that’s OK then… just the people, the government and the top companies way in debt… just the odd £2.5 trillion ($4.66 trillion), equivalent to about 2.5 times what Britain earns each year! (its GDP… “The total market value of all the goods and services produced within the borders of a nation”)

I don’t know the figures for any other countries, but I doubt Britain is special in this regard… so, just as long as we all know everyone else is in debt too, we’re OK, right?

Hmmm… am I wrong in wanting to swim against this tide of debt?

—> In this post the examples are fictitious. This information may not be construed as advice of any kind. If you plan to do anything similar to what I mention in this post, it is entirely at your risk. Consult an expert in financial advice if you require advice. Only you know your personal circumstances. Do your own calculations for risk vs reward and decide for yourself if you can use the banks free money to help you get out of debt.

In my crusade to wipe out debt (and I most certainly DO include mortgage debt in my thinking, not just “unsecured debt” such as credit cards, loans and overdrafts), I’ve been using a tactic to spend the bank’s money to save me cash.

One day, out of the blue, a credit card company sent me checks which I could use at a balance transfer rate of 0%. I hadn’t used the card before, so I guess they wanted to motivate me to use it. Zero percent APR is, effectively, free money. So I looked for the catch… they can’t really be giving me free money, can they? It turns out that the “catch” is the fee levied on balance transfers. In my case it was 2% of the amount transferred, or a £35 maximum. As I wanted to transfer a large amount, the £35 seemed like a good deal. The 0% APR offer lasted for six months, so I had to be sure I could pay off the debt after 6 months, or face hefty interest bills.

So I went close to the limit of the unused card by transferring money from it to my mortgage. I incurred a £35 one-off fee, but the money was saved me much more than that each month on my mortgage. After six months I paid off half the card and transferred the rest of the balance to a new 0% card. OK, so the transfer incurred another fee of £50, but this time the 0% APR rate is for 12 months.

Some things to note:

1: Pay off the card before the 0% APR rate expires or you’ll most likely get hit with interest at a much higher rate than your mortgage. It’s best to know you can pay off the card before starting the balance transfer process. You can leave the money you will use to pay off the card in a high-interest savings account or, if you have a flexible mortgage, withdraw the credit card cash when the time comes to pay off the credit card.

2: Watch out for cards that don’t limit the 2% transfer fee. If the 2% is unlimited, moving a lot of money could generate a hefty fee thereby making the whole process pointless.

3: Do the calculations in advance. How much will the fee be? How much interest will be saved per month. How many months does the interest-free offer last? How much will be saved in total?

4: Earned interest or saved interest? Some people take this “free money” and put it in a high interest account. I guess that’s feasible, but the interest you earn will be taxed. It may be better to use the free money to pay off a debt. For example, earning £100 in a high interest account may generate £80 after tax. Whereas putting the money on a mortgage and thereby avoiding £100 in mortgage payments, effectively earns £100.

5: Covering yourself. Any insurance policies for mortgage repayments may not cover credit card repayments should anything go horribly wrong.  

As long as you know what you’re doing, and you keep some careful records, this is a great way to use free money from the banks to temporarily pay off a chunk of your mortgage.

If you’ve been following my interest in getting out of debt, you’ll probably like this article in today’s Sunday Telegraph. Every week I read the views of this economist… what he thinks of the price of oil, the pound/dollar exchange rate, the housing market and lots more. In this week’s column he’s talking about debt… particularly the differences between secured and unsecured debt.

From what I understand, the world has been living in a low-interest rate environment… which has fed the housing market boom and the uptake of cheap loans, overdrafts and credit card deals.

But with the US Federal Reserve hiking rates over the past eighteen months, the European Central Bank boosting rates recently and even the Bank of Japan raising rates from zero (”Bank of Japan, confident of economic recovery, raises interest rates for 1st time in 6 years” - July 14th 2006, Associated Press) , the interest rate scene has changed.

Those people with big mortgages (not uncommon at the current high house price valuations) will be acutely sensitive to increases in interest rates… even more so for people with big mortgages and credit card debit. Central banks need to be very careful in their raising of rates to avoid precipitating a crash… either a housing market crash or a stock market crash if people’s confidence in their ability to repay their debts were to falter. High oil prices (which mean high gas/petrol/diesel) prices will also hit people’s cashflow hard as they filter down.

If higher rates are on the way, paying off as much debt as you can now seems a wise move. We have had it very good, economically, for a very long time. People have saddled themselves with lots of extra debts in a time of low inflation, high employment and low interest rates. Sooner or later the party will end and people who haven’t been paying attention will get burned. On the other hand, change is always accompanied by fresh opportunities…

I liked this quote from today’s Telegraph…

“People are acting as if they expect to be able to fund a longer and longer retirement with less and less saving.”

Apparently, only 1 in 4 people in their 20’s in England now pay into a private pension, compared to 1 in 3 just five years ago.

I like to return to this theme once in a while… it’s a personal goal of mine to avoid debt (including a mortgage… the big scam) and become debt free (scamfree) as soon as possible. I keep reading articles online and books offline to increase my financial education and avoid all the financial “scams” that people fall for. Believe it or not, I was reading a book by the hypnotist Paul McKenna and even he was talking about how to obtain financial freedom. He was adding up all the bit ticket purchases you make in a lifetime (house, college education for your kids, cars, holidays) and then adding to that the retirement pot of cash you’ll need… and his example came to a total of £1.25 million needed to secure financial independence and a happy retirement. (about $2.3 million!)

Just like I said in this post… we have to stop thinking about a “million” as a lot of money. You may well have to earn that, or something in that ballpark, in your lifetime to pay off your purchases and expenses and retire happily. Perhaps you’re comfortable earning that amount by the time you’re “expected” to retire at 65/67/70.

Personally, I’d like to “retire” as soon as possible. My “scamfree” date is Jan 2008… perhaps a little earlier… and then I plan to build a retirement pot. Why don’t you join me in this crusade?

Other posts about debt… here and here .

I want to be free from debt… all debt. I consider debt to be a big scam, and I don’t like being scammed. In fact, I want to be “ScamFree”. My personal date for being scamfree is January 2008… just 18 months away.

I don’t know the data for the USA, but here in Britain, we’re still piling on the debt…

…”various studies put the number of over-indebted people between 1m and 3m. People are considered over-indebted when they can only afford the interest on their loans but cannot pay off the principal amount.” source

There are only about 60 million people in Britain, so, given a 2m figure of over-indebted people, that’s about one in 30 who are deep in debt and only paying off interest!

Don’t let it happen to you! Pay off your debts as soon as possible… become ScamFree!