How will personal finance trends affect your finances in 2013?

Tuesday, 08 January 2013 05:36

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In the second part of our feature looking at what is in store for your finances in 2013 we take a look at the main areas of personal finances to see what we can expect to happen in the next 12 months and how it will affect your wallet.

Will it be easier to obtain credit, get a loan or a mortgage in 2012?

What will happen to savings rates?

How much will energy prices go up by and what markets are likely to provide the best investment opportunities in 2013?

Investments

The FTSE 100 ended 2012 close to a record high despite the struggling economy, so if there is a pick up in the economy in the latter part of 2013 the stock markets could be riding high.

The FTSE 100 ended 2012 at 5925 and has picked up in the first week of 2013 and is currently (Jan 8th 2013) hovering at around 6,050.

Most analysts expect the FTSE 100 to end this year higher than it finished last year and some commentators are even speculating that it could finish as high as 6,500.

Early signs are that there is growth in equity values and more investors are investing in shares rather than bonds or cash which is a good sign for investors as this is likely to boost the markets.

With signs that tensions are easing in the eurozone, investors are expected to look at higher-yielding assets in 2013. Although problems are expected to remain in Europe, the European Central Bank’s announcement at the end of the summer that it would intervene if necessary to buy bonds from indebted eurozone countries has placated the markets to a large degree, at least for now.

It appears that the trend in 2012, with investors opting for safe low-yield investment vehicles, could be coming to an end as people search for better returns.

Robert Currie of Nedbank Private Wealth said: "It is always useful to start any discussion about future performance by considering valuations. With the UK equity market currently on a price to earnings (PE) ratio of just 11, and 10-year government bonds yielding only 1.8pc, the case for equities is very strong."

Other sectors that are expected to be good bets for growth in 2013 are technology. Another good bet are manufacturers of food flavourings as emerging markets middle-classes grow and develop a taste for western-style foods.

Consumer Finances

The squeeze on household incomes is set to continue in 2013 with inflation remaining above the bank of England’s two per cent target, energy prices rising and a predicted increase in food prices.

Austerity measures are set to continue as the government tries to keep up with its own punishing set of deficit reduction targets.

The one bright spot is that the personal allowance for income tax is rising to £9,440, up from £8,105 which should mean most basic rate taxpayers see an extra £20 net income in their pay packets each month.

Clare Francis, site editor at MoneySupermarket.com, said: "With austerity measures lasting until 2018 at the earliest, it is clear that the pressures on our wallets won't ease for some time so taking action and being proactive is the only real option. Checking all of your outgoings and identifying where savings can be made should be a priority in 2013.

Mortgages

House prices are expected to be essentially stagnant in 2013. A number of different surveys from the Nationwide, Halifax through to predictions from the Council of Mortgage Lenders state that there could be minimal growth. We predict house price growth of between one and two per cent in 2013.

Prospects have improved slightly in the last few months with mortgage approvals rising for five of the last six months amid signs that the Bank of England’s Funding for Lending Scheme (FLS) is helping more people access mortgage finance.

Clare Francis, site editor at MoneySupermarket.com said: "There was a slight improvement in the mortgage market in 2012 with the Funding for Lending Scheme (FLS) appearing to be helping the availability of mortgages for those with smaller deposits and rates have become more competitive.

A number of mortgage lenders have cut rates on their fixed rate mortgages which means that for many homeowners who have been sitting on their lenders standard variable rate (SVR) the time could be approaching where they sign up for a fixed rate deal.

Analysts are predicting that the north-south divide in property prices is likely to deepen with London continuing to operate almost as a separate market.

One thing that we can predict with almost 100 per cent certainty is that base rate is not going to change anytime soon. It will remain at its record low of 0.50 per cent throughout 2013.

Another trend set to continue in 2013 is that lenders are likely to continue to stop offering interest-only mortgage products which means that it will become increasingly more difficult for homeowners on this type of mortgage deal to remortgage.

Clare Francis said: "Finally, I think interest-only mortgages will be a big story in 2013. The Financial Services Authority has said it thinks interest-only mortgages have a role in the market, albeit as a niche product, but with a number of lenders having already clamped down on the availability of interest-only loans, and some having stopped offering them altogether, there are real issues for many existing borrowers who have them".


Read part one: What will happen to the Uk economy in 2013?


Savings

2012 was a dreadful year for savers with base rate remaining at a record low it was almost impossible to get an inflation-beating return on savings unless you were prepared to lock your money away for at least three-years.

However, with the jobs market still uncertain it is expected that the amount of savings people make will continue to rise in 2013 as it did in 2012 as people strive to save money in case they lose their jobs.

Savers must be cursing the Bank of England. Firstly because of base rate being at a record low and secondly because there is evidence that the quantitative easing (QE) scheme causes inflation to rise making it even more difficult to get a real return on savings interest when compared with the prevailing rate of inflation.

Finally, the banks Funding for Lending scheme (FLS) means that banks and building societies can access finance for less and reduces their requirement to tempt savers to deposit funds with them. Thus, they can reduce rates and there is plenty of evidence that this is happening.

Moneyfacts has conducted research that shows the number of savings accounts are falling and the number with bonus rates are also steadily declining.

It reports that the number of easy-access savings accounts with a bonus has almost dropped by half in the last 12 months, down from 79 to 46 with the average bonus down from 1.34 per cent to 1.02 per cent.

Sylvia Waycot, financial expert at Moneyfacts.co.uk, said: “Providers no longer needing savers’ money to prop up bank balances, thanks in part to the Government’s Funding for Lending Scheme, have started streamlining their accounts.

“We now have less choice than we had four months ago, the rates are very much poorer and to add insult to injury, the introductory bonus has all but disappeared as banks shy away from attracting the attention of desperate savers.  

Current accounts

It is likely that there will be more competition in the current account market and the problems of 2012 that affected the big banks such as the ongoing payment protection insurance (PPI) saga and the manipulation of the Libor interbank lending rate diminish the reputation of established high street banks and encourage people to switch.

There are also some tempting offers floating about. The Halifax kicked off the New Year with a £100 switching incentive and a fee-free overdraft offer for the first 12 months which it hopes will bring 300,000 new customers in.

The switching service offered by banks has improved which should also encourage more people to make a change in 2013. Later in 2012, new rules come into effect that will force banks to speed up the switching process so that it takes no longer than seven working days.

New entrants to the market including Tesco Bank and Virgin Bank will also aim to break the stranglehold of the traditional high street banks in 2013.

Credit Cards

Credit card interest rates are showing little sign of falling as low as they should bearing in mind the position of base rate but balance transfer fees are falling due to competition in the market.

There is also likely to be increased competition which means there should be some good cashback options available and zero per cent interest on purchases deals, already up to 24 months should remain competitive.

Loans and Debt

The best deals on personal loans are now at a ten-year low. Tesco Bank started the New Year by reducing the rate on its loans between £7,500 and £15,000 to just 5.2 per cent, leapfrogging Sainsbury’s Bank and the Derbyshire Building Society to the top of the best-buy tables.

One side effect of the FLS scheme is that it should mean that rates on personal loans continue to fall.

Tim Moss, head of loans and debt at MoneySupermarket.com said: "With the Government's Funding for Lending scheme gathering full steam, the lenders have capitalised on this to produce the lowest loan rates on record.

However, it should be noted that not everyone will be successful in applying for the top headline rates, though in order to advertise these lenders need to offer the best rate to 51 per cent or more of their customers.

However, on a more cautious note, the squeeze on households and living costs in 2012 saw the rise of payday loan companies and people borrowing from month to month just to cover mortgage or rental costs.

This trend is likely to continue in 2013, though hopefully with more effective regulation to weed out the firms that mistreat customers.

Tim Moss said: "Consumer payday loan appetite sees no sign of abating. With bank's underwriting policies looking unlikely to change, we predict that customers will still flock to find loans in other places – for the moment Payday will remain at the top of that pile.

Car insurance

Car insurance costs stabilised in 2012 after rising by 15 per cent in 2011. The rise was about half this amount last year.

Insurance premiums for younger drivers are likely to continue to rise as they will do for female motorists as a result of the EU gender directive that came into force on December 21st 2012 that bans insurance companies from assessing costs based on the sex of the policyholder.

Pete Harrison, insurance expert at MoneySupermarket.com said: "The impact of the ECJ ruling on gender will start to filter through into the New Year and it will become much clearer how motorists will be affected by the new prices."

Home insurance

Flooding has been the most topical issue affecting home insurance in 2012. The Association of British Insurers (ABI) wants the government to extend an overdraft to it to pay for extra costs it will incur from June which would be repaid by charging all home insurance premiums an extra £10 if they are in a flood-risk area.

An agreement that allows flood-risk homes to get insurance comes to an end in June 2013 and the ABI and the government have been unable to find a solution.

Hannah Jones, head of home insurance at MoneySupermarket.com said: "Flooding will continue to be a major issue for home insurers next year, especially with the Statement of Principles coming to an end on 30 June. With over 200,000 properties at risk of having no insurance as a result, this needs to be a priority for the Government and the industry.”

Energy

Gas and electricity costs have been a hot topic in the final few months f 2012 as each of the “big six” suppliers raised costs by an average of eight per cent taking a households annual dual fuel bill to more than £1,300 with energy bosses warning that there are more rises to come in future years.

Consumers need to put a note in their diaries to switch in August and take advantage of the cheapest and longest fixed rate deals available at that time as the past has shown that these deals are taken off the market just in time for the inevitable price rises we can all expect in the Autumn of 2013.

Once this winter is finished gas consumption falls dramatically so it is not so important to switch now, especially as it takes up to one month by which time this winter will hopefully almost be over. One bright spot is that so far it has been a relatively mild winter which means most households will not have used as much energy as normal.

Clare Francis, site editor at MoneySupermarket.com said: "Energy price rises have become an annual event over recent years and I expect 2013 to be no different. However, there are simple things people can do to protect themselves from higher bills. Firstly, switch to a fixed tariff – not only could this mean a reduction in the price you pay for gas and electricity now, you will also be insulated should we see another round of price hikes in 2013. Secondly, take measures to improve the energy efficiency of your home.

"There is likely to be increased interest in energy efficiency from government and the industry in light of the 2012 Energy Bill as politicians and providers seek to encourage us to use less gas and electricity in order to offset the additional amounts we will have to pay over the coming years to cover investment in renewable energy sources.

"Households should take advantage of offers such as free loft and cavity wall insulation – it can knock a few hundred pounds off your annual energy bill. And look to take other steps to reduce your consumption such as turning the heating down slightly, doing your washing at a lower temperature and having showers rather than baths. All of these things make a difference and can collectively result in significant savings."

Read more: A step-by-step guide on how to find the cheapest energy deals

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