Five ways to benefit from low inflation

Last Update: Tue, 16/02/2010 - 10:11

Inflation is on the up - find out five ways you can benefit from the low rate of inflation before it's too late.

1. Pay off your debts

Paying off your debts is good financial advice in most scenarios, but in a period of low inflation, it makes even more sense.

For a start, clearing your debts will leave you better off and will have a positive impact on your credit ratings. Secondly, you’re probably paying a higher interest rate on your credit card, personal loan or mortgage than you could earn in a savings account at the moment.

Increasing your monthly repayments can cut the overall amount you owe and reduce the amount of time it takes to clear this. For example, a borrower with a £1,000 balance on a credit card at 16.9% APR who pays the minimum repayment of 2% for 12 months, will rack up £151.74 in interest – and only bring the total debt down to £920.60 – according to research by moneysupermarket.com.

But the same customer could slash their overall balance by nearly £400 and pay nearly £30 less in interest by increasing their repayments to 5% (£50) per month. Paying 10% per month (£100) would enable the borrower to clear their debt in 12 months and only pay £79.16 in interest.

2. Start saving

Likewise, starting or increasing the amount you save is always a good idea. If possible, you should aim to have a savings pot equivalent to at least three months' income just in case the worst happens and you lose your job or just need the cash for an emergency.

For savers, the current situation is a mixed blessing. Low inflation in this case also means low interest rates; the Bank of England base rate is currently just 0.5%, and as a result savings rates are well below the levels seen last year.

However, the gap between the base rate and best-buy savings accounts has widened. .

An instant access ISA is probably the best home for your ‘savings buffer’ as providers will allow you access to your money and it will grow tax-free. You can save up to £7,200 in an ISA each tax year, of which £3,600 can be held in a cash account. On 6 October 2009, the ISA allowance increased to £10,200 for the over 50s, of which £5,100 can be held in cash. This new ISA allowance will apply to younger savers from April 2010.

Alternatively, an instant access savings account will do the job, if you've already used your ISA allowance.

Once you have built up an emergency pot, you can consider different methods of saving. A fixed-rate deal is ideal if you want to lock away a set amount of money for a pre-agreed period of time. If you haven’t used your ISA allowance, then you can opt for a fixed-rate tax-free account to lock away your cash in. However, withdrawals will not be permitted and you may not be able to make further deposits either.

A regular savings deal is also a good way to build up a savings pot.

3. Overpay your mortgage

The CPI is the official measure of inflation in the UK, but it doesn’t include housing and mortgage costs. This is actually measured by the Retail Prices Index (RPI), which reflects the impact of house price falls.

You can, however, beat the falling value of property by making overpayments on your mortgage - especially if you’re on your lender’s standard variable rate (SVR), have a tracker loan or have benefited from cheaper rates on new fixed-rate deals.

Other than the fact this will reduce your overall mortgage term and the total amount of interest you pay on the loan, overpayments makes sense in a weak housing market. The larger amount of equity you have in your property, the higher the potential that you will be offered a better value mortgage when you next come to remortgage.

Bear in mind, though, that unless you are on an SVR you might not be allowed to make overpayments. Check with your lender to find out how much you are allowed to overpay before you are hit with a penalty.

4. Cash in on falling prices

The falling rate of inflation reflects the fact that some costs are falling, or at least not rising by as much as they were last year. If you have a big purchase to make, then buying it now might just make sense.

European holidays, white goods and TVs, furniture and homeware all fell in cost in 2009, although items such as digital cameras, clothing and computer games have risen.

In addition, now could present a greater opportunity for haggling on price. Asking for a discount isn’t just a technique you reserve for when shopping abroad. Haggling over prices is becoming more common in the UK, as people increasingly get up the courage to be a little bit cheeky.

People tend to have their own style of haggling, but generally speaking being polite but firm is a good way to win a discount. Don’t try and push the price down too far – work out a price you’d be happy to pay and then suggest something a little lower. If the retailer doesn’t want to play ball then there is no obligation to buy and you can just walk away.

Remember, the worst thing that could happen is they say "no". You have nothing to lose by asking.

5. Renovate your home

Whether your plans to move up the property ladder have been thwarted by the credit crunch, or you simply have the money to make some improvements to your home, then 2010 could be the year to renovate. Not only can improving your property potentially increase its value, but it is also an alternative to moving.

And in a period of deflation, the cost of renovating could become cheaper. Builders and other contractors – including architects – could be more open to price negotiations.

Call round several firms in your area and get some quotes. With many businesses suffering during the recession, you may find they are desperate for your business – the fact that the cost of raw materials has also fallen in the past 12 months will also help your case.

As with shopping, don’t be afraid to ask for a cheaper price but, equally, try and be polite about it. Bullying your builder probably isn’t the best way to go about renovating your home.

Before you consider renovating your home, make sure you find out whether you need planning permission. For more details about planning applications and costs, visit planningportal.gov.uk.

You should also contact your insurer before you start work to make sure you are covered.