New mortgage 'distress' warning fired

Work longer or rein in your spending. That's the Bank of England's (BoE) grim warning to the UK's 11 million or so mortgage holders. The BoE thinks a 1% rise in interest would cause considerable "distress".

Though the base rate is low at 0.5%, many banks and building societies may hike rates well before the Bank of England does. Are you at risk? %VIRTUAL-SkimlinksPromo%

Stretched

Many clearly are. If you have a £100,000 mortgage, your repayments would climb £60 a month if interest rates were to rise 1%. That's an extra £720 to find from your take-home annual pay. Many British mortgage owners on interest-only details are even more exposed.

Then there's all the aspiring home-owners considering George Osborne's Help to Buy scheme. A rush to buy would likely jack up house prices further, but also increase the amount of home owners - many already stretched to the max on teaser rates - buying into the property market when interest rates, realistically, can go in one direction.

Struggling

Longer term there's little padding for things to get better. Some people, particularly couples on joint incomes, may be able to manage small interest rate rises. But working longer isn't available for may British workers as many roles are already part-time. Meanwhile UK wage growth remains close to zero.

"A weak increase in the average UK wage was," said the most recent Asda Income Tracker report "a key factor behind the rising cost in living, with average pay up just 0.9% in the three months to April." That's less than a third of the rate of essential item inflation at 2.9%.

Shafted?

Other pressures build: gas and electricity prices are up 8.3% and 7.7%, compared to a year ago, Asda's report claims. The cost of borrowing for many people is way more expensive than any headline 0.5% Bank of England base rate, despite vast amounts of QE shovelled at the banks.

For example, the cost of a business loan for almost 20% questioned in a recent Federation of Small Businesses Credit index saw rates on offer as high as +7.99% with some being offered loans at up to 11%. No wonder the Bank of England is nervous. There's little slack left.

Remember when mortgages were offered on three times an annual salary...

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New mortgage 'distress' warning fired

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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