Over 1000 times the cost of a mortgage

Posted on: 30 May 2018 by Peter McGahan

One in four of us went overdrawn last year and 2.1 million people were overdrawn all year. The cost of this credit is a huge waste of money. So what are the practical steps to take?

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‘A job for life at the bank boy’ … they said.

At the heart of any culture of any financial organisation should be the word trust.

Yet, year on year, those financial organisations who know the right thing to do, just don’t do it, and you pay through the nose for it.

I’m sure you’ve seen the recent news regarding overdraft fees, which is another startling example of banks preying on the needy. We don’t need food after a banquet. Similarly when we are hungry we don’t wish to be deprived of a meal, or charged over a thousand times as much as we should be.

Which, the consumer champion, in true supporting form showed that banks are charging more for overdrafts than the outrageous payday loans. Santander was the worst offender with £179 interest over a 30-day period on a £100 unarranged overdraft.

179% for one month’s lending is quite different than the 0.145% charged by the average mortgage lender; in fact it’s 1,234 times as much. Put another way, you will pay as much interest on an unauthorised £100 overdraft as you would pay on a £123,400 mortgage.

Santander weren’t alone and many of the main banks are equally as guilty. TSB, HSBC, First Direct, Royal Bank of Scotland and NatWest were all found to be charging more than six times the extortionate payday loans.

Whilst the regulator will complete a review on the overall costs of overdrafts this year, and look to introduce measures to deal with them, how much wasted interest will disappear from your bank accounts before this comes into effect.

Santander have announced they will be altering their charges and not before time.

Remember, however, last year Lloyds announced they would be ‘streamlining’ their charges. In November last year they announced that customers would pay 1p per day for every £7 in overdraft.

Those words may mean little to the people finding themselves stuck in this hole. This daily interest compounds and can equate to 52% per year. Streamlined?

Remember a mortgage is only 1.74% per year.

If you go online, each bank has an overdraft calculator so you will be able to see what you are truly paying.

My concern with the ‘tap and go’ culture is that many will fall into this black hole of cheap quick credit. Stepchange the debt charity said that overdrafts were the second most common debt they dealt with. Amazingly, one in four of us went overdrawn last year and 2.1 million people were overdrawn all year.

That is an extortionate cost of credit and a huge waste of money.

The issue of overdrafts is often down to simple budgeting as is the use of credit cards. I have seen countless scenarios of late were credit card companies are charging over 30% and banks are trashing the consumer at the other end with bank charges as above.

The numbers are part of the answer but undoubtedly the first stage is to squeeze spending until the finances are under control.

Most businesses go under because of cashflow and the same is true of household debt. Whilst some credit cards allow a quick switch to a 0% deal, it’s not long before the rate is back to normal.

Consider the above cost of a £123,000 loan compared to a £100 overdraft. Sometimes it’s just best to consolidate at the lowest possible rate, breathe, pull the spending in, and then use the interest you are saving to pay the mortgage debt back off again.

Many borrowers say they like to keep the two items separate, believing incorrectly, that if they default on an overdraft it doesn’t affect their house. The accumulating interest, fines and debts are all still payable and if you have an asset they will be able to get their money back one way or another.

Adding insult to injury, the above scenario will have a downward spiralling impact on your credit score, meaning that future credit will, at best, be more expensive, or perhaps not even available at all.

If you haven’t read the book ‘when is the best time to eat a toad’, this is one of the best examples of it.

If you have a question on your debts please call 01872 222422  or visit us at wwfp.net.

About the author

Peter McGahan is the owner of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.

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