Credit FAQ: Will the Government Shutdown Damage the Credit of Furloughed Workers?

It’s January 11, 2019 – the first day paychecks will not arrive for some federal workers due to the government shutdown. Among other worries, furloughed employees may be wondering how missed or delayed debt payments might impact their credit if the shutdown continues and they’re unable to pay their credit cards or other bills on time.

The good news is, you’ve got a little bit of time. For all credit card statements received, regardless of when, the due date will be at least 21 days AFTER the date of the statement date. This is a CARD Act requirement. For all other loans, the due date is set by the lender in accordance with their policies and state and/or federal regulations.

Even if your credit liabilities are not paid by the DUE date, the lender CANNOT immediately report you as being delinquent to the credit reporting agencies, unless you are already at least 30 days delinquent. The credit reporting agencies have a longstanding rule that only permits delinquency reporting by lenders AFTER the payment is a full 30 days past the due date. There is no systemic way to accurately report someone as being “1-29 days late.” It doesn’t exist in credit reporting.

For example: If your due date is April 15 and you do not make your payment, the earliest your lender can report you as being “late” to the credit bureaus is May 15.

Can government workers be protected from negative credit reporting and credit score damage resulting from not receiving a paycheck?

There are four “parties” involved in credit reporting and credit scoring: your lenders (data furnishers), the three credit reporting agencies (Experian, TransUnion, Equifax), credit score developers (FICO, VantageScore), and borrowers (me and you). Here’s how each of them might play a role.

Data Furnishers: These are companies that “furnish” or report information to the credit reporting agencies. These are almost always financial services companies, loan servicers, or debt collectors.

Data furnishers are the most important party as it pertains to the impact of late payments on furloughed or unpaid government workers. They can choose to report late payments to the credit reporting agencies, or choose to not report late payments to the credit reporting agencies.

(There is an exception: Student loan servicers that service federally guaranteed student loans are bound by their agreements with the federal government to report late payments to the credit reporting agencies.)

If the lender/data furnisher chooses to provide some sort of deferment or forbearance to their borrower and NOT require payments to be made during the government shutdown, then their borrowers would not accumulate late payments during the shutdown. That would mean no “shutdown based” credit report or credit score impact.

Credit Reporting Agencies (CRAs): There is no systemic method for the CRAs to prevent late payment reporting for a minor subset of the U.S. population simply because they have been furloughed or are otherwise unpaid because of the shutdown. The CRAs don’t know who is furloughed and who is not. They also don’t know which late payments are caused by the shutdown versus those that have been caused by something else. There is also no way to code any particular account as being “subject to government shutdown.”

There’s very little, if any, direct action the CRAs can take during the shutdown, other than advising their data furnishers on their credit reporting options.

Credit Score Developers: Credit scores are influenced by what appears on a consumer’s credit reports, as reported by the furnishers. The models that are currently commercially available do not have a facility that would allow consumers to escape influence from the credit reporting of late payments by lenders who have government borrowers.
There’s no exception programmed into credit scoring systems that can differentiate between late payments caused by a government shutdown and those caused by some other reason.

• Read more: How Credit Scoring Models Actually Work

Borrowers: To the extent borrowers can continue to make at least their minimum payments while they are furloughed, this will protect their credit reports and credit scores from any negative credit impact caused by the furlough. If borrowers cannot or choose not to make their payments, they may very well end up with late payments on their credit reports — which will remain there for the subsequent seven years, as allowed under federal law.

Borrowers can certainly make the case to the CRAs that the reason they couldn’t make their payments was because of the government shutdown. At that point, the CRAs would likely contact their lenders for guidance on how the account should be reported. This is, and has long been, a standard practice when a consumer challenges information on their credit reports. The lender can either choose to have the CRAs remove the late payments (called a “goodwill deletion”), or they can choose to have the CRAs maintain the late payment(s), which would be completely legal.

Executive Order: It is possible President Trump could issue an executive order that protects furloughed government employees from late payment credit reporting. This executive order could direct lenders and servicers to NOT credit report any late payments to the credit reporting agencies for their borrowers who are government employees.

More by John Ulzheimer:

• Credit FAQ: When Does a Late Payment Show Up on My Credit Report
• Use a Credit Freeze to Stop Identity Thieves Cold
• Three Legitimate Ways to Raise Your Credit Score Fast

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

The post Credit FAQ: Will the Government Shutdown Damage the Credit of Furloughed Workers? appeared first on The Simple Dollar.

Source The Simple Dollar http://bit.ly/2M4Xfv4

Whole Foods discontinuing value-focused 365 store concept

Whole Foods Market is going to discontinue its smaller, value-based 365-brand concept stores, according to an internal memo from CEO John Mackey obtained Friday.In the memo, Mackey said the grocery chain will continue to operate its 12 existing 365-brand stores but will not open any new stores, and that employees of those stores will see no change.“As we have been consistently lowering prices in our Whole Foods Market stores over the past year, the price distinction [...]

Source Business - poconorecord.com http://bit.ly/2QFXhtS

The 2 Website Analytics Tools Pros Actually Use in 2019

I personally love data and analytics tools.

But here’s the straight truth: you need a lot less than the analytics industry wants you to believe.

Most experts will try to convince you that you need an analytics tool for everything. More data is always a good thing, right?

I used to believe that myself.

Over the last few years, I’ve changed my stance on the entire analytics category. These days, I prefer to keep things as simple as possible. One or two tools is about all I need. Less infrastructure to worry about, fewer complexities to manage, and an easier system for teams to use and act on.

The Analytics Tools I Use

• First, I get my main tool in place, which is almost always Google Analytics.
• If I need a true enterprise product, I use Adobe Analytics.
• I avoid installing any user analytics tools to start — too much effort required for too little value.

A few extra tools I use for specific projects

• If you have a lot of user flows to improve, get a heatmap tool. The best is Crazy Egg.
• If you’re making SEO a priority, get an SEO tool. I use SEMrush, but also like Ahrefs.
• If you do a lot of conversion optimization and A/B testing, get an A/B testing tool. I recommend Optimizely.
• Once you’re large enough that it makes sense to consolidate all your data into a single source of truth, get a real business intelligence function built out along with the infrastructure to support it.

Why You Should Trust Me

I’ve spent a decade managing online marketing teams and websites with millions of visitors per month. Part of that time I was the head of marketing at an analytics company: KISSmetrics.

Not to mention the hundreds of companies I’ve consulted for, the analytics certifications I have, and the countless number of reporting and data projects I’ve managed over the years.

Now let’s get to the straight truth on these tools.

Overall Best Website Analytics Tool: Google Analytics

Without a doubt, Google Analytics is the best analytics tool out there.

While working at KISSmetrics, I did a bunch of competitive research on Google Analytics. I’ve also done plenty of Google Analytics consulting over the years.

There are few counter-intuitive insights I’ve learned about Google Analytics along the way.

First, people love Google Analytics. The user satisfaction scores are always sky high. When I saw how happy users were for the first time, it seemed like an insurmountable challenge. Remember, I was working at a competitor.

Here’s the weird part though.

Very few people actually use Google Analytics for anything other than checking the total traffic on their site.

In other words, most people log into Google Analytics, look at one of the basic reports, check to see how many total people visited their site recently, and then log out.

That’s it.

For a long time, I didn’t understand how to reconcile these two facts: People barely use Google Analytics, but they also love it. How can both of these things be true at the same time?

It dawned on me that seeing total site traffic is a huge ego boost. It validates our work. It feels great to see people visiting our sites. It feels so good that we’d be furious if Google Analytics ever shut down.

That feeling is so powerful that people don’t need much else from Google Analytics.

I used to think this was a problem. Look at all that other data! Think of all the other insights that will grow your business! It’s all right there in the other reports!

Now I have a more nuanced understanding.

Realistically, you’ll install Google Analytics and you’ll only use it to check your total traffic. And that’s totally okay. It’s still a major data point for you to run your site and business. Plus, you’ll get the motivational boost that comes from seeing how many people visit your site. If that’s as far as you ever take it, don’t feel guilty — you’re still getting a ton of value from Google Analytics.

If you’re ever in the mood to check a couple of extra reports in Google Analytics, here are two of my favorites that are also easy to understand:

1. You can see which traffic sources send you traffic. I prefer the Source/Medium report that’s under Acquisition > All Traffic from the sidebar. I like seeing the exact sources that send traffic instead of broad channels, since it’s a bit easier to come up with insights that are worth acting on.
2. You can see which pages on your site bring you traffic with the Landing Page report. It’s under Behavior > Site Content in the sidebar. Look for patterns in the pages that seem to keep bringing in traffic over time, then ask yourself how you can do more of that.

Those two reports alone will keep me busy for years on end. They’re also easy enough for anyone to use without getting overwhelmed. You can also install a Google Analytics add-on to Google Sheets and manipulate the data there. When you’re ready for more, try out these six advanced moves.

Analytics Tool Alternatives

• Clicky
• Matomo (used to be called Piwik)

Best Free Analytics Tool: Also Google Analytics

Not only is Google Analytics the best analytics tool out there, it’s also 100% free. It’s an amazing deal. Google has a reputation for having the best engineering team on the planet and it’s ridiculous that all of us get to take advantage of that expertise with a free tool.

Whenever I build a new site, the first thing I do is install Google Analytics. It’s an ingrained habit.

The only downside to the free Google Analytics plan is its data limit. Once your site gets to a certain size, you’ll notice that Google Analytics will start sampling your reporting. This means the data isn’t 100% accurate because Google Analytics is only reviewing a percentage of your real data, say 75% for example, and is making a prediction on the last 25%. The more data you have, the less “real” data is included in each report. You won’t start to see this until you have hundreds of thousands of visitors per month.

Some folks deeply hate data sampling and consider it a huge problem. These days, I don’t worry about it. It’s a small cost to get access to an analytics tool as high quality as Google Analytics without having to pay a dime. I only get concerned once a site is generating many millions of visits per month and the majority of data starts getting sampled.

Best Enterprise Analytics Tool: Adobe Analytics

At the enterprise level, Adobe Analytics is the de facto winner. Over the years, it’s gone by several names including Adobe SiteCatalyst and Omniture.

It has a very strong reputation in the space and can support the truly enterprise needs like deep customization, implementation support, uptime requirements, and so forth.

In the last few years, Google has pushed into the enterprise space with its Google Analytics 360. If you have a site with serious volume and are already bumping against the free limits of Google Analytics, it might be worth looking at Google Analytics 360.

To decide between Adobe Analytics and Google Analytics 360, I’d ask myself if I simply need more of what I already have with Google Analytics. If I were already getting everything that I wanted and just needed the “enterprise” packaging to unlock higher data volume, more support, service agreements, etc., then I’d go with Google Analytics 360. But if my goal were to seriously uplevel my analytics capabilities beyond Google Analytics, I’d go with Adobe Analytics. It’s a more complete analytics package that extends beyond the website-only focus of Google Analytics.

In most cases, I’d go with Adobe Analytics.

Enterprise Analytics Tool Alternative

• Google Analytics 360

Best User Analytics Tool: Amplitude

In the last decade, a new set of user analytics tools have cropped up.

The previous generation of tools, like Google Analytics, focused really heavily on websites and traffic. Those tools were designed solely to get insights on your website.

As the internet evolved, lots of tech businesses needed data focused on users instead of on websites. They needed things like persistent user identities to track users over the long term, funnel reports to see how people moved through their apps, and cohort reports to see how user behavior changed over the long-term.

Companies like KISSmetrics and Mixpanel filled this market need. They were the main competitors in the space for several years. The easiest way to explain the difference between them is that KISSmetrics had the cleanest and highest quality data structure while Mixpanel had easier and cleaner reporting.

Recently, Amplitude jumped into the category and pushed a very generous free plan that includes plenty of tracking volume and lots of the main reports you’d want to use. Most of the competitors now offer substantial freemium plans, largely because Amplitude set the freemium bar so high and they were forced to match it.

Because of its generous freemium plan and the quality of its reporting, we recommend Amplitude if you’re looking for a user analytics tool.

What Happened to KISSmetrics?

This is the analytics company that I worked for and led its marketing team for a period. If you go to the website today, it points to Neil Patel’s website, one of the original co-founders. Needless to say, KISSmetrics is not really considered a competitor these days.

A Word of Caution on User Analytics Tools

User analytics tools are not cheap. Even if you’re on a freemium or modestly priced subscription with one of these tools, that’s only a fraction of what you’ll spend.

First, you’ll spend a ton of time on the install. You will need an engineer and someone else on your team who knows your business, the user flows, and analytics tools pretty well. The implementation support from the tools themselves tends to be poor.

Then there’s the maintenance to keep the tracking up to date. User flows change, products evolve, new organization goals are set. All of that impacts your tracking, which has to be updated regularly in order to keep your data accurate.

And finally, in my experience, very few people in the organization are comfortable using analytics tools. They either stick to one or two basic reports, or avoid the tool entirely. So if you want to get the full value of the tool, you’ll need someone with real talent and skill for pulling reports. This ends up being an analyst or a product/marketing manager who can dedicate a decent amount of their time to reporting. That’s time that could be used elsewhere.

In contrast, tools like Google Analytics are relatively easy to set up. Add the Google Analytics tracking script on every page of your site and you’ll get 80% of the data that you need right away. User analytics tools aren’t nearly as easy to set up and maintain.

This is why I recommend most folks skip the user analytics category entirely — too much effort for too little gain.

User Analytics Alternatives

• Mixpanel
• Heap

Best Heatmap Tool: Crazy Egg

Analytics tools give us a ton of information on what’s happening to our websites.

But sometimes…

It’s too much information. Rows and rows of data, hundreds of reports, more metrics than we can every possible understand.

Heatmaps do an amazing job simplifying everything, making it really easy to understand what people are doing. Heatmap reports take one of the pages on your website and show you visually where people are clicking on that page. Within a few seconds, you’ll see exactly what what people click on and what they don’t. In my experience, everyone on the team instantly understands the major insights from a heatmap tool.

Acting on those insights is pretty easy too. Two simple rules will take you pretty far:

• For the stuff that people click on the most, do more of that.
• For stuff that people don’t click on, get rid of it.

A heatmap tool is the easiest and most beginner friendly way to start using analytics to make your sites better. Run a heatmap on the top three more important pages of you site (like your homepage, product page, pricing pages, or sales page) and go through several design iterations using the two rules above. That’ll give you a drastically improved website without a more complicated website analytics setup or analysis.

Heatmaps are also really powerful when you’re trying to improve a bunch of user flows, like an online or mobile app. You can glean tons of valuable insights on what users are trying to do, allowing you to iterate on your user flows and drastically improve them.

We recommend Crazy Egg because the quality of its tool stands out in the category. They have several variations of the heatmap report like confetti, clickmaps, and scroll maps to give you even more insights. The quality of its data and reporting is also top-notch. It was one of the first heatmap tools on the market, and it has added more functionality in the past few years like user recordings and A/B testing.

Heatmap Tool Alternative

• Hotjar

Best A/B Testing Tool: Optimizely

Before we get into Optimizely itself, a quick sidenote.

I love love love A/B testing. You could call it my first career passion.

That said, most companies shouldn’t be running A/B tests. That’s right. For the vast majority of companies, A/B testing can be completely ignored.

While A/B testing is a reliable way to improve conversion rates on a website, it requires a ton of data, a lot more than most industry experts recommend.

Otherwise, it takes too much time, too much money, and the impact on the business is too minor for it to be worth it.

If you have lots of data to work with and are ready to take the plunge into A/B testing, I recommend Optimizely. It’s got all the A/B testing features you’ll need, tracks data the most accurately, and is pretty easy to use.

The biggest downside: the price.

Over the last few years, Optimizely has aggressively pursued larger companies as its customers and has largely left small businesses behind. Pricing is no longer listed on the website, a sign that the focus is on enterprise businesses at higher price points. A few years ago, we spent more than $10,000 per year to use the tool.

Optimizely is my go-to choice if you’re at a large company.

If you’re smaller, you’ll need to go another route.

Best A/B Testing Tool for Small Businesses: Crazy Egg

In the past, I would have recommended VWO (formerly Visual Website Optimizer). Like Optimizely, it’s one of the primary A/B testing tools on the market.

Unfortunately, it looks like VWO has begun to pursue an enterprise strategy too. Prices are no longer listed on the site — not a good sign for small businesses. It’s been longer since I’ve used them, so I don’t know what the current pricing is, but it’s safe to assume that it’s too high for a small business.

Crazy Egg has released an A/B testing tool alongside its heatmap reports that’s focused on beginners and businesses that don’t have the resources for an entire team dedicated to A/B testing. Pick a page on your site, make a few edits with Crazy Egg, then get simple data on which version you should keep.

Best SEO Tool: SEMrush

As SEO has evolved, it’s gotten increasingly competitive and data driven. There’s also a host of metrics that are completely unique to search, like keyword rankings, monthly search volume, and backlink volume.

It’s possible to get some of these metrics from Google Analytics but to get everything, you need to sign up for an SEO tool.

My favorite SEO tool is SEMrush.

The biggest reason is SEMrush has the easiest reporting compared to the other SEO tools. It’s perfect for beginning or intermediate SEO marketers.

That said, I’m also a big fan of Ahrefs. It has a ton of depth that advanced SEO marketers will love. But it can be a bit overwhelming at first, especially if you don’t have a deep background in SEO.

I’ve never been a huge fan of Moz. The reporting never clicked with me and I always end up switching back to SEMrush or Ahrefs. If you end up liking the feel of Moz, it is a well-respected tool in the category.

SEO Tool Alternatives

• Ahrefs
• Moz

What About Analytics for Paid Marketing Channels?

Google Ads (formerly AdWords), Facebook, and other paid marketing channels need a ton of data to run effective campaigns. Since companies like Google and Facebook have extreme incentives to give you the highest quality data possible, they’ve invested in their own data and reporting. The analytics in Google Ads and Facebook Ads are world-class — you’ll get everything you need.

All you need to do is install a JavaScript snippet on the page of your website that signifies a conversion took place. The page that means you acquired a lead, a sale, or a new user. The JavaScript snippet will tell the ads platform that a conversion occurred, helping you optimize the campaigns for your business. There are other ways to set up conversion tracking, but this is the easiest.

Other paid marketing platforms follow this same format. Reporting and data is built into the ad platform and tracking is handled by installing a JavaScript snippet that logs conversions.

What’s the Difference Between Website Analytics and Business Intelligence?

Website analytics is the online marketing and website data for a business. Business intelligence includes all of the data for a business.

As more and more business data moves into the cloud, the line between these two categories has gotten blurred. CRMs (like Salesforce) now include a lot of marketing and campaign data. The marketing automation tools (like Marketo, HubSpot, Pardot, etc.) that have become a standard part of the marketing infrastructure at many companies produce marketing data too.

Once you get large enough, you’ll want to combine all of these sources into a single database and source of truth for your customers. That’s where business intelligence comes in. It typically involves putting together a data warehouse (Amazon Redshift is a popular choice) with a reporting tool that sits on top of it like Tableau. This approach is very expense, pretty complicated, and difficult to maintain, so only go this route once your business is large enough to truly get value out of it.

In the meantime, integrate your tools with one another whenever you can while keeping things as simple as possible.

Recap: My Analytics Tools Recommendations

To recap, here are my three core recommendations:

• Use Google Analytics for your website analytics.
• If you’re a true enterprise customer, consider Adobe Analytics.
• Avoid user analytics tools.

“Extra” tools for specific use cases:

• If you have a lot of user flows to improve, get a heatmap tool like Crazy Egg.
• If you’re making SEO a priority, get an SEO tool like SEMrush.
• If you do a lot of conversion optimization and A/B testing, get an A/B testing tool like Optimizely.
• When you’re large enough, build a real business intelligence function.

Source Quick Sprout http://bit.ly/2smPiYZ

'21 Days of Prayer and Fasting': Chris Pratt Seeking God on New Daniel Fast

Hollywood superstar Chris Pratt isn't shy about his faith, and now he's making headlines for going on a biblical Daniel fast. 

Source CBNNews.com http://bit.ly/2M3l2LK

My Spending Has Put Me in Serious Debt. Should I Consolidate?

Dear J.J.,

That “I can’t stop spending” feeling isn’t just some kind of personal weakness. It’s a widely studied psychological phenomenon.

Behavioral economists have figured out that various forms of payment have different “pain” levels. Pain of payment is worst when you pay with cash, because you can see and feel the bills leaving your wallet and entering someone else’s register. There’s a little bit less pain when you use a debit card and the money leaves your checking account immediately.

But credit? Paying with a credit card is just about painless. Not only are zero dollars leaving your account at the time you acquire an item or service, but you also have the option of putting off that payment for weeks, months, years, forever. Just as much as we love instant gratification, we love procrastinating.  

So when you see a credit limit that you have not maxed out, you see a big green light. Go! Do not slow down. Spend it until it’s gone. The pain hides until it’s time to pay the tab.

You need a big change to get out of the cycle. You need to plot out every dollar of that debt and how you’re going to pay it off. Taking a personal loan to consolidate your credit card debt only works if:

1. The interest rate is lower than all your other debt.
2. You take out a loan for the exact amount you need to cover your current debt — and not a penny more.

You need to create a financial no-temptation zone. It’s time to call in an accountability partner. This is someone you trust and can talk to about money — a friend, a colleague, a cousin. Someone who will scold you gently if you get off track and cheer you on when you hit small goals along the path to paying off your debt. They’ll make sure your payoff plans are bold but reasonable. They’ll help shoulder the pain of paying off your debt and remind your brain of the intangible, but important, pleasure of having less debt.

This will take years, and I don’t mean just paying off your debt. I mean rewiring your brain to live within your means. It’s something even the most financially savvy of people struggle to overcome. It’s easier to spend money than ever before, especially money that is not truly yours to spend. Paying it back will feel distinctly un-fun.

But if you can envision a debt-free future and the ease it will bring to your life — your accountability partner should help get you pumped up for this — you’ll start to see those debt payments as steps toward financial freedom.

Have a tricky money question? Write to Dear Penny and you might see your question answered in an upcoming column.

Lisa Rowan is a personal finance expert and senior writer at The Penny Hoarder, and the voice behind Dear Penny.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

The Penny Hoarder Promise: We provide accurate, reliable information. Here’s why you can trust us and how we make money.

source The Penny Hoarder http://bit.ly/2FlcTBT

What Is a ‘Backdoor’ Roth IRA? How Can It Benefit Me?

A little while ago on The Simple Dollar, Saundra Latham wrote a nice summary of how a backdoor Roth IRA works. Since then, I’ve seen a number of follow-up questions regarding backdoor Roth IRAs, so I thought I’d write a complementary article explaining some of the things that people were asking questions about.

Mostly, these questions centered around why a person would want to do this. Hopefully, between these two articles, any basic questions you have about a backdoor Roth IRA can be answered; if you have plan specific questions, you should talk to your investment firm or to your 401(k) plan administrator at work.

Let’s start off with explaining a few key terms, just so no one’s lost right off the bat.

A Roth IRA is a special type of investment account that virtually anyone earning an income in the United States can set up. They’re offered by most investment firms and many banks.

You put money into a Roth IRA directly from your checking or savings account, just like writing a check or doing a bank transfer. When the money is in that account, you decide how it is to be invested, as most Roth IRAs give you a wide variety of investment options. Most of the time, the money in a Roth IRA is put into an investment that will have nice long-term returns, like stocks. Any returns earned on your money while in a Roth IRA stays in that account until you choose to withdraw it.

Roth IRAs have two really nice features. One, you can withdraw your contributions at any time. If you put $1,000 in there and then decide you want that $1,000 back three years from now, you can take it out with no problems at all. However, you can’t touch the gains without paying taxes and an additional penalty, unless you take advantage of the second benefit, which is that if you’ve had the account for five years and you’re 59 1/2 years old or older, you can withdraw the gains tax free.

So, if you put in a bunch of money in your 20s or 30s and just let it sit there until you’re 65, it’s likely tripled or quadrupled in value and you can withdraw all of it without paying taxes on it. Talk about an efficient way to supplement Social Security!

That’s why a lot of people want to contribute to a Roth IRA – it’s a really great way to save for retirement.

There’s a catch, though – well, two catches. First, you can only contribute $5,500 a year (or $6,500 a year) to your Roth IRA. That’s the cap for now; it is sometimes adjusted upwards by an act of Congress.

Second – and this is the important one – there’s a maximum income limit for contributing to a Roth IRA. As of tax year 2018, if you’re single, you can only contribute fully to a Roth IRA each year if your income is $120,000 or less (this is found on your income tax as your MAGI, or “modified adjusted gross income,” if you want to figure out the exact number this is judged by). If you’re married filing jointly, your combined income must be $189,000 or less. If you’re married filing separately, it’s even trickier – you can generally only contribute the full amount under special circumstances. There’s a bit of a leeway above those dollar amounts where you can contribute a reduced amount, but even that loophole closes with incomes above $135,000 if you’re single or $199,000 if you’re married and filing jointly.

So, if you’re a person below those income levels – and about 90% of Americans are below that level – you don’t need to worry about a “backdoor” Roth IRA at all. You can just contribute normally without worrying about it. The “backdoor Roth IRA” only matters to people earning above the income cap for a Roth IRA – about 10% of Americans. If you’re not in that 10% group, don’t worry about it at all! You can stop right here and move on to something else, unless you’re just feeding your curiosity.

So, what can the remaining 10% of people do? They have the option of contributing to a traditional IRA or to their workplace retirement plans.

A traditional IRA is a lot like a Roth IRA except that there are no income limits – anyone can open one. You have to pay income taxes on the money you take out in retirement. However, if your workplace doesn’t offer a retirement plan, then the first $5,500 you contribute to a traditional IRA is tax deductible (with a few loopholes, as there always are with these things). You can make non-deductible contributions to a traditional IRA, too, meaning you pay taxes on your contributions now, but taking advantage of that requires a lot of bookkeeping.

For people earning a lot during their career but not planning to earn much when they reach retirement age, this isn’t a big deal. Their tax rates will be low when they’ve reached retirement age, so paying income taxes on the money they take out of a traditional IRA in retirement won’t take a big bite out of their income. For those people, a traditional IRA is perfect.

The problem comes when someone is still earning a lot in retirement and wants to take money out of their traditional IRA. They’re going to pay a lot in taxes. Those are the people that a “backdoor Roth IRA” is going to help.

A “backdoor Roth IRA” simply means that you’re moving the money in an existing traditional IRA (or an eligible workplace retirement plan) into a Roth IRA. The catch, however, is that you have to pay income taxes on the amount that you’re converting.

So, if you have $8,000 in a traditional IRA and want to convert it to a Roth IRA, you can do so, but you’ll have to pay income taxes on that $8,000. However, after that point, it’s Roth IRA money, which means that (a) the $8,000 is treated as a contribution so you can withdraw it when you want and (b) once you’ve had the account for five years and you’re 59 1/2 or older, you pay no taxes on the earnings on that $8,000 when you withdraw it. So, you pay $2,000 or $3,000 or so in income taxes this year, but after that, it grows for the rest of your life without ever having to be taxed.

Again, a “backdoor Roth IRA” is really only a good idea if (a) you’re in the top 10% of income earners in America and (b) you’re going to be earning a similarly high income when you eventually “retire” or reach age 70. If either one of those isn’t true, then a “backdoor Roth IRA” isn’t for you and you don’t need to worry about it.

One final note: you’ll occasionally hear talk of a “mega backdoor Roth IRA.” This is a similar tactic that’s perfect for people who want to save enormous amounts of money in a Roth IRA, far above the $5,500 a year limit. However, it requires you to have a 401(k) plan at work that allows you to make non-Roth after-tax contributions – meaning that you can take money from your checking account (or straight from your paycheck after taxes are deducted) and contribute it into your 401(k) plan. Not all plans do this; in fact, many do not. If your plan does allow this, you can make up to $36,000 per year in those kinds of contributions to your 401(k) and then convert all of that money straight into a Roth IRA. Of course, this is all after-tax money, meaning you’ve already paid income taxes on it this year.

This is really only a good idea if you’re very concerned about high taxes in retirement or if you’re extremely young and can bank on your investments in your Roth IRA quadrupling (or more) in value by the time you reach the age where you can take money out of your Roth IRA. If you’re young and single and want to really hammer your retirement savings early in your career, this is a thing well worth considering. If you’re considering it, talk to the administrator of your 401(k) plan at work and ensure that you’re allowed to to make non-Roth after-tax contributions. You’ll also want to find out if you can make in-service withdrawals, which means that you can immediately do the “mega backdoor” Roth IRA conversions; if not, you have to wait until you leave your job and then do the conversion all at once.

Good luck!

Related Articles:

• Roth IRA vs. 529 Plan: Which Is Best for College Savings?
• The Best Roth IRAs
• How to Sign Up for a Roth IRA
• Four Ways to Use a Roth IRA That Have Nothing to Do With Retirement

The post What Is a ‘Backdoor’ Roth IRA? How Can It Benefit Me? appeared first on The Simple Dollar.

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Renters Rejoice: Here’s 8 Ways to Reduce Your Heating Bill

My money lessons: Paying for the wedding of their dreams

When Jack Sandford met the love of his life he found enjoying the good things and planning for the future a tough balancing act. And when he popped the question, he realised the wedding they had both dreamt of would require incredible financial discipline

After leaving university in 2012, I was fortunate enough to quickly land a good job in insurance.

I was in the honeymoon period of finally earning a proper wage after years of studying. I set up a modest savings plan to fund the things I wanted: a proper winter coat, a new bike, a decent phone contract. At least that’s what I planned in my budgeting spreadsheet.

I soon realised that I should be saving a lot more than I was, for something more meaningful.

I set up a Stocks and Shares Isa and began paying in around 30% of my disposable income each month, laying the foundation of what I hoped would be a deposit for a property.

• Men splashing the cash on engagement rings

But I hadn’t planned for one of life’s major events. I met the love of my life just a few months later.

Saving didn’t seem as important any more. Neither of us had our own place, so we spent a lot of our time in pubs, restaurants and cinemas.

I rethought my long-term savings plan and replaced it with holiday goals, fancy restaurants and spa breaks.

We were both living in the moment. I was just about living within my means, but not every month, which meant debt started to creep in. I reduced my Isa payments further, to pay my overdraft.

I felt like I was losing control of my finances. A pattern of uncontrolled spending followed by months of austerity developed. I knew this wouldn’t get me to a deposit.

When my girlfriend and I got serious we realised we should plan for the future.

We started renting together, but not long after I inherited some money which put us in a position to buy our own flat.

We were able to do something positive in an unfortunate situation. Our new mortgage was cheaper than renting and I was able to save again.

jack-hannah.jpg

Jack and his fiancée, Hannah

Fast-forward to March 2018. Hannah and I had been together for five years and we’d owned together for nearly three.

I found a use for a chunk of my savings and got down on one knee. She said yes (never any doubt!) and we were engaged.

I’d spent months thinking about rings and how much to spend. But, blinded by the excitement of getting engaged, I got carried away and forgot that after the engagement comes a wedding to pay for, the biggest one-off expense we would face in our lives after buying our home.

We’re very fortunate that our families can help with some aspects of the wedding, but we will be paying for most of it ourselves.

• Couples save £4.5k tying the knot abroad

The wedding is in April, and we have a rigorous savings plan.

We’ve never had such a big savings target before. When I was saving for a deposit there was no time limit and I had no real idea how much I needed, but the wedding has a price tag and a deadline.

We’ve had to completely rethink our approach to money.

As the author of many personal finance spreadsheets, I did what I do best in the face of money challenges and opened Microsoft Excel.

First we itemised every wedding-related cost.

Next, we listed all of our outgoings and looked at our total disposable income over six months rather than monthly.

Looking at finances on a longer-term basis is great because you immediately see the long-term benefit of small adjustments.

Just taking in a packed lunch to work on three out of five working days and cycling to work at least twice a week I have saved over £700.

It’s also good for morale. Seeing our monthly disposable income multiplied by six shows us that the wedding target is achievable.

• A quarter of couples get in debt to fund their big day

But it does also mean constantly checking statements and updating the plan based on the previous month’s actual spend.

No more reckless months: we both stand on the money scales every week to see how many pounds we’ve gained or shed.

The motivation is that we’re going to have the biggest celebration of our lives with our friends and family.

We know how lucky we are to be able to have the wedding we want and it has reminded us that saving and planning is part of life, no matter how small those savings are.

I hope after the wedding is done and paid for, we will keep up the momentum and grow our nest egg.

But maybe a honeymoon first.

Do you have a lesson you’ve learnt about money you’d like to share? Please email editor@moneywise.co.uk

 

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Start scheming to buy your first home

With some experts predicting house prices will fall by as much as 10% to 15% this year, you could be in a good position to negotiate hard if you’re a first-time buyer. Here, we look at how to access all the help available to boost your deposit and find a mortgage you can manage

According to UK Finance’s latest Mortgage Trends, there were 35,500 new first-time buyer mortgages completed in August 2018 (the latest figures available) – its highest level since June 2017. That’s encouraging news for anyone thinking about taking their first steps on the property ladder.

First-time buyers can benefit from schemes to encourage homeownership. With Help to Buy (H2B) Isas, the government will top up your savings by 25% (up to £3,000), which you don’t have to pay back. However, there are drawbacks: the purchase price of your property cannot be more than £250,000 (or £450,000 in London); it must also be the only property you own and where you plan to live.

Your first payment into your H2B Isa can be up to £1,200 and then you can pay up to £200 each month. One drawback with this type of Isa is that you can’t use it to pay for the deposit of your first home: your solicitor or conveyancer will apply for the extra 25% on completion of your property transaction.

• “We cleared our mortgage early AND SAVED thousands of pounds” - Here’s how you can too

H2B Isas are available from Aldermore Bank, Bank of Scotland, Barclays, Clydesdale Bank, Halifax, HSBC, Lloyds Bank, Nationwide, NatWest, Newcastle BS, Santander, Ulster Bank, Virgin Money and Yorkshire Bank.

Savers also have the choice of a Lifetime Isa (Lisa), and can move their existing H2B Isa to a Lisa. The Lisa allows a maximum contribution of £4,000 a year with a government bonus of up to £1,000 a year on top of this – as compared to a total bonus of £3,000 with an H2B Isa.

Savers under the age of 60 must use the cash to buy a first property worth up to £450,000. Given that the average deposit in the UK outside London is £20,000, according to Nationwide, a first-time buyer saving £4,000 a year could save enough in just five years. However, the Lisa has a sting in the tail when it comes to exit fees, which H2B Isa savers don’t face.

At the time of writing (December 2018), there are just three cash providers. Newcastle BS offers the top cash rate at 1.1% tax free/AER, while Skipton BS and Nottingham BS both offer a disappointing 1% – and you currently have to sign up in a branch for Nottingham BS’s Lisa.

There are also stocks and shares Lisa providers with varying fees and annual management charges, which require minimum investments ranging from £100 to £500. These include AJ Bell, Foresters Friendly Society, Hargreaves Lansdown, Moneybox, Nutmeg, OneFamily and The Share Centre.

But the future of Lisas could be under threat after last summer the Treasury Committee called for them to be scrapped due to their “perverse incentives and complexities”.

Tom Selby, a senior analyst at AJ Bell, explains: “If someone contributes the maximum £4,000 over 10 years [into an investment Lisa], they will have invested £40,000 in total. This will have been topped up with £10,000 of government bonuses to give a total investment of £50,000,” he explains.

“If this grows at 5% a year, after charges the fund will be worth £65,956. If the investor takes that money out before age 60, is in good health and does not use it to buy a house, the 25% exit charge would be a whacking £16,489.”

There were 35,500 new first-time buyer mortgages completed in August 2018

Help to Buy equity loan

With a Help to Buy equity loan, the government will lend first-time buyers and home movers up to 20% (40% in London) of the cost of a new-build home worth up to £600,000 in England. You’ll need a minimum cash deposit of 5% and a 75% mortgage, and you won’t be charged interest on the loan for five years.

Help to Buy Wales runs a similar scheme for new-build homes up to £300,000.

Scottish buyers can apply to the Help to Buy (Scotland) Affordable New Build and Help to Buy (Scotland) Smaller Developers Scheme for homes up to £200,000 for the financial years 2018-19, 2019-20 and 2020-21. The Scottish government will take an equity stake of up to 15% of the value of the property.

There is no equity loan scheme in Northern Ireland.

Visit Helptobuy.gov.uk, Helptobuywales.co.uk or Beta.gov.scot/policies/homebuying for further details.

• Will property prices crash in 2019? Experts share their predictions

Shared ownership

Shared ownership offers you the chance to buy a stake in a property owned by a housing association or private developer in England. You will need to be eligible for a mortgage on your share of the property, which is generally 25% to 75% of its value, and pay a discounted rent on the remaining share. To be eligible, your household earnings must not exceed £80,000 a year (£90,000 in London).

You can gradually increase your ownership by buying shares from the housing association, known as ‘staircasing’, but if property prices rise your new share will cost more.

If you are aged 55 or over, you can buy a share of up to 75% with the Older People’s Share Ownership scheme in England, at which point you will pay no rent on the remaining 25%.

In Northern Ireland, a Co-Ownership scheme enables buyers to buy between 50% and 90% of a property up to £165,000 and pay rent on the remainder.

Visit Helptobuy.gov.uk/shared-ownership or Co-ownership.org.

Scotland’s Open Market Shared Equity scheme helps people buy a home on the open market with price limits depending on the area, while its New Supply Shared Equity scheme helps with purchases of new-build homes. For more information, visit Mygov.scot/open-market-shared-equity-scheme.

Shared Ownership – Wales allows you to buy between 25% and 75% of the value of your chosen property with a repayment mortgage. Visit Beta.gov.wales/shared-ownership-wales.

Since October’s Budget, first-time buyers in shared ownership homes in England and Northern Ireland don’t have to pay stamp duty on the first £300,000 of properties costing up to £500,000, putting them in line with other first-time buyers.

“You will fare better if you put down a bigger deposit”

Right to Buy

The government’s Right to Buy scheme offers a discount of up to £80,900 (£108,000 in London) to council tenants in England who want to buy their council house and have lived in social housing for at least three years.

However, Right to Buy is no longer available in Scotland, and the scheme in Wales – which has a discount of up to £8,000 – ends on 26 January 2019.

In Northern Ireland, the maximum discount is £24,000 for tenants who have lived in their council home for more than five years.

Visit Righttobuy.communities.gov.uk or Housingadviceni.org/right-buy.

Social HomeBuy

If you don’t have enough money to buy outright but have lived for more than five years in a housing association or local authority property in England only, you may be able to buy a minimum 25% share of your home through Social HomeBuy.

You could receive a maximum discount of between £9,000 and £16,000, depending on the share you buy and the property’s location, and the landlord will reduce your rent accordingly. Contact your local council to see if it runs the scheme.

Starter Home

If you’re aged between 23 and 40, a first-time buyer, and have a maximum household income of £80,000 (£90,000 in London), the government’s Starter Home scheme will allow you to buy a new-build home with at least 20% off the market price.

The discounted price must be less than £250,000 nationwide and £450,000 in London. To register your interest, visit Ownyourhome.gov.uk/scheme/starter-homes.

First-time buyers who get parental help could buy 2.6 years earlier

Help from Mum and Dad

More than a third of first-time buyers in England need a family gift or loan to help them buy their home compared to 20% seven years ago.

The 2017 study by the Social Mobility Commission also revealed that first-time buyers who receive money or a loan from their parents could buy 2.6 years earlier in the UK and 4.6 years earlier in London than those who don’t have parental support.

Guarantor mortgages, where a parent’s income is considered, are fairly niche now. Lenders, such as Barclays and Family BS, offer guarantor mortgages, for example, if an applicant can prove they can afford the repayments or that their earnings are likely to grow in the future – as would be the case with a trainee lawyer or doctor.

But another option is a mortgage where parents or close relatives can offset some of their savings as a security for the deposit or offer collateral from their own property.

Barclays Family Springboard mortgage allows anyone to help you with a mortgage of up to £500,000 on a property in the UK (except for new-builds) if they lock away 10% of the purchase price in cash. Keep up the repayments, and ‘helpers’ get their savings back after three years with interest (currently 2.25%). Helpers are named on the mortgage but not on the property title, so they won’t pay stamp duty.

Similarly, the Family Building Society offers a Family Mortgage, which can be secured with a 95% loan-to-value (LTV), and family members can secure a lower interest rate for the buyer by using their own savings or property as security.

Bath Building Society’s Parent Assisted Mortgage Scheme will consider the applicant’s income (which must be at least £20,000) and some security from a parent’s property.

Some lenders allow buyers to include the rent from letting out a room in their mortgage calculations. Bath’s Rent a Room Mortgage considers the potential rent from one tenant, while Market Harborough’s Family Assisted 100% LTV mortgage works in a similar way, with consent for rent from up to two rooms.

If you’re off to university, both Loughborough and Bath building societies offer Buy for Uni mortgages that factor in potential rental income, as well as security from parents or close relatives.

• House price growth grinds to a halt in 2018 but 'lots to be cheerful about' in 2019

Joint mortgages

Another way parents can help is to take out a joint mortgage with their children, owning a share of the property.

David Hollingworth, associate director at L&C Mortgages, explains: “More lenders have shifted away from traditional guarantor mortgages, but would allow parents to go joint on the mortgage. That will achieve the higher borrowing amount, but could result in a capital gains liability, as the parent would typically have to be joint on the ownership of the property. That could also result in being ineligible for first-time buyer stamp duty relief and the stamp duty surcharge of 3% on additional properties applying.

“Some lenders, including Barclays, Post Office and Metro Bank among others, will allow the parent to be joint on the mortgage but the title to be only in the child’s name, which sidesteps that issue,” he adds.

However, if lenders require that parents are named on the property deeds, John Bunker, tax solicitor at Irwin Mitchell, advises caution.

He says: “Where a property is bought jointly by two or more people, if any one of those people has any interest in a second property the 3% extra stamp duty will be payable.

“We recommend that parents consider giving loans to children, rather than taking a share of the equity, which can still be protected on the registered title,” he adds.

Go it alone

If you need a mortgage without parental help, plenty of lenders offer products with a 95% LTV.

Mr Hollingworth says: “Although the very cheapest rates are on offer to those with large deposits, a more competitive mortgage market has seen things develop for first-time buyers with more limited resources. The market for 95% mortgages has remained solid with more lenders entering the sector, and rates are consequently improving. One of the current lowest two-year fixed rates at 95% LTV is available from Skipton Building Society at 2.82% with a £795 fee.

“Although high LTV rates are more widely available now than they were, borrowers will still fare better if they put down a bigger deposit. For example, stretching to a 10% deposit could potentially cut 1% or more off the interest rate. In relation to this, HSBC currently offers a rate of 1.79% to 90% LTV with a £999 fee.

“Like any borrower, it is important for first-time buyers to consider fees as the lowest rates can come with bigger fees. There’s a good range of product options now, and some will offer other incentives for first-time buyers, such as free valuation or cashback. It can therefore pay to look at overall value rather than focus too heavily on rate.”

“Without Help to Buy, we would have had to wait a lot longer to buy a property”

Kate-and-Ted.jpg

“We were lucky enough to snap up the last property of the day”

First-time buyers Kate Whelan, 24, and her partner, Ted Nimbe, 25 (pictured above), have bought a two-bedroom apartment at Hazlemere Marina, in Waltham Abbey, Essex.

The couple bought the £309,999 apartment with a £15,000 deposit, using the government’s Help to Buy equity loan scheme. The development of apartments and houses by Bellway Homes is located on the banks of the River Lee.

“It was actually my mum who came across the open day online,” says Kate. “It was our first time visiting a new homes development, and we only planned to have a browse and see what was on offer.

“We were amazed to find out that people had been camping out over three nights to secure a home. After waiting for four hours, we bought the last remaining property overlooking the river.

“One of our favourite things about living here is the strong sense of community. When we moved in, we had a joint house warming with our neighbours who we had met at the launch, and now we are all great friends.”

Kate adds: “Without Help to Buy, we would have had to wait a lot longer to buy a property and to have moved quite far away to find a home we could afford.”

 

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“We cleared our mortgage early AND SAVED thousands of pounds” - Here’s how you can too

Fancy being mortgage-free sooner rather later? Two homeowners who managed to pay off their mortgage early explain how they did it. Plus, experts offer their smart tips so you can take the first step towards ditching that home loan

Being mortgage-free can feel like a way-off dream – especially as mortgage terms continue to grow. But there are ways to clear the mortgage early, giving you a few hundred extra pounds in your bank account every month and a huge saving on interest payments.

So how can you do it? We hear from two homeowners who have successfully paid theirs off early and experts on their tips on ridding yourself of a mortgage.

For most of us our mortgage is a huge debt that we carry with us for most of our adult lives. But not everyone is a slave to a monthly repayment. Some people strive to clear their mortgage early in order to save money and have more freedom.

• House price growth grinds to a halt in 2018 but 'lots to be cheerful about' in 2019

One such person is Suzanne Elsworth, 45, a freelance communications consultant. Suzanne and her husband David, 55, cleared the mortgage on their home in Cockermouth in Cumbria four years early. By doing so, they saved over £10,000 in interest.

“We were four years away from paying off the mortgage and knew we had enough savings to do that early, while still keeping some money in reserve,” says Suzanne. “It seemed crazy to continue paying interest to the building society.”

At the time they still owed £25,000, but years of saving meant they could afford to clear the debt.

“We’re good at saving, despite our house being a renovation project, and loving luxuries such as eating out and holidays,” says Suzanne. “I don’t think we do anything particularly fancy in order to save, but I am quite disciplined. When clients pay me, I immediately put 20% of every payment aside to pay my tax so I will never get caught out. I then stash anything above what I’m likely to need day to day into a savings account so it’s not as easily spendable as being in my current account.”

Suzanne also credits her frugality with helping them get to the point where they could clear their mortgage early.

“I always shop around to switch energy deals, insurance and so on, and most of our supermarket shop is done in Aldi. I try to focus on energy efficiency so go around switching lights out and I won’t heat the whole house when I’m working from home.”

The savings pot also got a boost nine years ago when Suzanne took voluntary redundancy from her job in corporate communications.

ruth-mortgage-free.jpg

Suzanne Elsworth, 45, who works as a communications consultant, and her husband David, 55, cleared their mortgage four years early

They intended to use the payout as a safety net while Suzanne found her feet as a freelancer.

“I’ve worked hard and been lucky enough to find some great clients who keep on coming back, and that meant we never needed to touch that money.”

Having looked at their finances, and how much they were parting with in interest on their mortgage, Suzanne and David decided to take the plunge and use their nest egg to pay off their mortgage four years early.

It may seem like only trimming a small amount off a mortgage debt that usually lasts for quarter of a century. In fact, they saved themselves over £10,000 in interest by clearing the debt early.

“The best thing about being free of a mortgage is the feeling of relief,” says Suzanne. “You know that the whole house is yours for keeps and your money is now your own.”

With mortgage repayments no longer draining their monthly income, Suzanne is now focusing on boosting her pension.

“The best bit is you know the whole house is yours”

The average repayments on a mortgage add up to £8,039 a year, according to Halifax. Clear your mortgage and the average homeowner will effectively have £650 a month extra in their bank account.

The idea of having a bit more cash in the bank each month motivated Pádraig Floyd, 47, to focus on saving up the money to clear his mortgage. He and his partner, Fran, had built up a £30,000 nest egg and thought the best thing they could do was use it to free them from their mortgage. Then they were hit with a flurry of bad news.

“We’d been saving hard to pay off the mortgage and had more or less decided to pull the trigger when my other half was diagnosed with breast cancer, just after I was made redundant,” says Pádraig, a journalist from London.

They were facing a very lean, distressing time with the combination of unemployment and long-term sick leave. Then they finally got some good news. Their mortgage insurance policy had a clause in it that meant it paid out in the event of critical illness.

“It cleared the mortgage plus a small bonus,” says Pádraig. It meant they could invest their savings to provide them with an income and not have to worry about mortgage repayments.

“I could go freelance, so I could be there throughout Fran’s treatment without worrying about how we would meet the mortgage repayments.”

Fran has now been clear of cancer for seven years and being mortgage-free has made a huge difference to their lives.

“Being mortgage-free has given us greater control over our finances,” says Pádraig. “This also gives us a lot of flexibility should we suffer illness or redundancy before we expect to retire.”

Pádraig’s case shows that being mortgage-free removed a major burden at a time when he needed to be able to focus on more important things than money.

“You’ll have a lot more money in your account every month”

“Government figures show that the average mortgage-holder paid just over £8,000 last year in mortgage repayments,” says Angela Kerr from consumer group the HomeOwners Alliance. “Clearing your mortgage will mean you have a lot more money in your account every month.”

The good news is paying off your mortgage isn’t an impossible task. There are numerous ways you can start moving towards a mortgage-free life.

“Becoming mortgage-free is a dream for millions of homeowners across the UK,” says Daniel Hegarty, chief executive of online mortgage broker Habito.

“While it might seem an impossibly long way off for most, there are several ways you can pay your mortgage off faster.”

One option is to use your savings to clear your mortgage. But there are a number of things you need to consider before you take this option.

• Are Londoners fleeing the capital? Property money outflows reach 10-year peak

mortgage-free-2.jpg

 

Firstly, will you still have enough money in savings to cope with the unexpected? Once you’ve paid off your mortgage your money is locked up in your house and is therefore very difficult to access if you suddenly need some cash.

Secondly, read the small print on your mortgage agreement for rules on overpayments.

“Most lenders allow you to pay back 10% extra a year without incurring an early repayment charge,” says Mr Hegarty. Make sure you won’t be clobbered with a hefty charge before you make any big repayments.

If you do make a big overpayment, then make sure your lender doesn’t reduce your monthly payments as a result. If they adjust your monthly repayments to reflect the lump sum you’ve cleared, you won’t end up clearing your mortgage any faster.

If you don’t have a large nest egg, you can still take steps to speed up your path to mortgage freedom. Make sure you remortgage regularly to keep your interest rates as low as possible.

“If your home has increased in value, you’ll have a lower loan-to-value (LTV) ratio, which gives you greater access to lower interest rates meaning lower monthly payments,” says Mr Hegarty. “But, rather than cashing in the monthly savings, you can keep your payments the same and instead opt to reduce your mortgage term – getting it paid off faster.”

If you get a pay rise, you could also consider increasing your monthly mortgage repayments. Just make sure you don’t accidentally end up overpaying too much and incurring an early repayment charge.

“Even small regular overpayments can significantly cut down the time it takes to pay off your mortgage, and potentially save you tens of thousands of pounds,” says Sam Mitchell, chief executive of online estate agent Housesimple.com.

• Rise of the landlord-in-law: 2.5 million young people return home - with a partner in tow

How offset mortgages work

The danger of repaying your mortgage is you could end up with all your savings locked away in your property, leaving you high and dry if there is an emergency.

One way to pay off your mortgage faster without locking your savings away is an offset mortgage.

“You place your money into a savings account which is linked to your mortgage, and your savings are ‘offset’ against your mortgage debt,” says Mr Mitchell. “This means you’ll reduce the amount of debt you have to pay interest on.”

Let’s say you have £30,000 in savings and a £100,000 mortgage. With an offset mortgage, you’d put your savings in a linked account and only pay interest on £70,000 of your mortgage.

This could shave over £5,000 off the interest you paid on your mortgage over 10 years, assuming you have the best rate offset mortgage at 1.95% compared to a traditional mortgage with the same interest rate. Plus, you could repay your mortgage early thanks to less interest mounting up.

The drawback? No interest paid on your savings. But, says Daniel Hegarty of online mortgage broker Habito: “You can pay off your mortgage faster and still access the cash for a rainy day.”

The lowest rate offered on an offset mortgage is currently Chelsea Building Society’s two-year fixed stepped offset. It has a rate of 1.92% on up to 65% LTV.

Ruth Jackson is a freelance journalist who writes for a wide range of outlets including The Times, LoveMONEY.com and The Week, and has appeared on Radio 2 and Share Radio

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