Do you pass our financial stress test?

This week, the media reported how the banks of Britain passed a financial test this week as industry regulators agreed they were in a position to withstand future economical shocks. However, when looking at the finances of many of their customers, many experts believe many UK households are at the breaking point already and could not cope with unforeseen events.

According to the Yorkshire Building Society over a third of survey respondents said they would only have enough money to last 11 days if they were out of work.

This sort of statistic is rather worrying, and considering how much mortgages have featured in the news over the last couple of years we thought we’d put together our own mini financial test, so see how you fare:

1. Do you earn more than you spend?

Many people never add up how much they spend compared to how much they earn and instead judge their finances based on how long they can remain in credit throughout the month or by how far overdrawn they are before their pay cheque lands. It is certainly not the most exciting thing to do, to sit down and work it all out and add up all your expenses, but this is just what a mortgage advisor would help you work out before taking on a new mortgage and what he/she would recommend you do regularly throughout.

You can work it out on piece of paper, a spreadsheet or on one of the online tools that will help prompt you to consider all your outgoings. If you find you’re spending more than you earn then it’s time to take a serious look at where you can start to earn a little more or what you can cut from your spending patterns. Consider cutting out coffees from the coffee shops, replacing expensive gym fees with a few pieces of home equipment and check all your direct debits. Think about making the best use of any remaining money, perhaps setting aside some for a rainy day.

2. Do you know how much your mortgage will increase by for every 0.25% increase that the Bank of England puts in place?

As the base interest rate has remained at an all-time low for some time, many borrowers have been lulled into a false sense of security and don’t actually know the answer to this question – or how they’d pay the increase if it happens. Check your incomings and outgoings and if you can’t afford a few increases, look at ways to increase your income and/or decrease your outgoings now or consider a remortgage to a fixed rate deal.

If you’re on a fixed mortgage, then this shouldn’t be an issue for now – but if you are on a fixed rate deal, you should still consider the question and make sure you know when your mortgage deal will end so you can be prepared.

3. Do you have savings to cover your mortgage repayments and outgoings if you found yourself jobless?

When you take out a mortgage, a responsible mortgage advisor should ask how you would cope in such a situation, so that you can consider your answer carefully. Generally, we should all aim to have enough savings to cover 3 months’ of outgoings in such a situation but as the Yorkshire Building Society survey showed, few do.

Income protection insurance can help up to a point and many borrowers take this out when they first take on a mortgage – but equally many scrap the policy when things get tight, forgetting the protection it offers. If you don’t pass this question, then look to question 1 so you can start to put away some savings, no matter how little your contributions might be or take out some income protection; it’s a good idea as your home may be at risk of repossession if you fail to keep up repayments.

These are the three main questions any financial stress test should cover. How did you do?



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