Making the final payment
Three years after signing a trust deed most people find themselves making their final payment. This is a tremendous achievement; three years is a significant period during which careful budgeting and financial discipline are required. Many people feel a strong sense of liberation and success having dealt with what, prior to signing the trust deed, may have seemed to be an impossible financial challenge. Congratulations, and a celebratory event, are both well-deserved.
The trust deed closure process
If you have met all of your responsibilities under the trust deed, your trust deed company will have some administrative work to process in order to close your case. This includes calculating the amount due to each creditor, issuing payments to the creditors and writing to you with confirmation of your discharge. The amount of time that it will take for you to receive your letter of trust deed discharge will vary from company to company, but four to eight weeks is a realistic guide upon which to base your expectations.
Saving an emergency fund
After you have completed your final trust deed payment you will find that your monthly disposable income has increased significantly. Many people have been paying hundreds of pounds into their trust deed each month, money which is now theirs to spend as they choose. Of course it’s natural that people will want to relax their finances a little and enjoy some purchases that have not been possible for a while. However some serious cash saving is strongly advised.
Financial advisers suggest that all of us should build up an emergency cash fund which contains a minimum of three month’s salary. This money is intended to cover you in the event of a major financial upheaval such as redundancy, ill-health, major vehicle repairs or essential repairs to your home. These types of unexpected costs are amongst the major causes of people getting into unmanageable debt and seeking a trust deed in the first place. Having an emergency fund in place will help to protect you from these risks in the future.
Securing your financial future
After you have established the protection of an emergency cash fund, it may be sensible to speak with an Independent Financial Adviser about your longer-term financial wellbeing. If you currently have an interest-only mortgage you might consider switching some or all of the balance onto a repayment basis; a failure to do so may result in having to pay a mortgage throughout retirement.
You may not have made any provision for retirement income, such as a pension. An IFA will be able to discuss pension options with you to help ensure that your financial needs as a pensioner are met.
In addition to your emergency cash fund you may also wish to look into some of the tax efficient ways to build up an even bigger financial safety-net. ISA’s are one of the ways that people accomplish this. Some types of protection insurance might also be considered, perhaps to cover a temporary loss of income for example.
Using credit again
For most people, most of the time, credit is a good thing. Some people who have completed trust deeds are firmly of the opinion that they will never use credit again. Others wish to enjoy the benefits of credit again albeit in a cautious way.
There are several potential benefits of being able to access credit. Credit cards are convenient and relatively secure when travelling, may offer extra security when internet shopping, and may be essential for some purposes such as renting vehicles. Those of us that have to personally fund work expenses may need credit cards to carry us through to the point at which employers reimburse us.
Credit also allows us to smooth over periods of higher and lower expenditure. Christmas is an obvious example of an expensive period and using credit to help manage the extra expenses may be no bad thing provided that the balances can be quickly repaid over the next month or two. Major purchases such as a home or vehicle may simply be impossible without the use of credit.
Your credit rating, and therefore your ability to access credit, will have been affected significantly by a trust deed. The trust deed will remain visible on your credit record for a period of six years from the date that it started. Missed payments before the start of the trust deed, and any default notices issued by your creditors, will also remain on your credit record for six years. These issues will affect credit availability and the terms upon which credit might be offered. Taking some practical steps will help to restore access to mainstream sources of credit over time.
Practical ways to improve your credit rating
There are a number of steps that you can take to rehabilitate your credit rating. The first step is to review your credit file. Following the end of the trust deed you will normally find that creditors have marked any default notices that they issued on your accounts as being “satisfied”. Some creditors may fail to do this and you will need to contact them to request that they promptly update the credit reference agencies. If you spot any other inaccuracies on your report you should also contact the relevant creditors requesting amendments.
It is important to remember that a credit rating is not just based upon negative events. It is also based on positive events, such as making your debt repayments on time each month. To have an excellent credit rating you will therefore need to be seen to be managing any existing lines of credit well. If you have no existing lines of credit, there will be no positive information being reported on your credit file which will hold your credit rating back.
Mortgages are reported on credit files. If you have a mortgage it is fundamentally important that you pay in-full and on-time every month. A mobile phone contract can be useful, especially if you set up the monthly payment to be on direct debit so that there is no danger of a missed or late payment.
Some people obtain one of the high-interest credit cards that are available to persons with poor credit records. Provided that the card is used for smaller purchases (that can easily be repaid in full when the bill arrives) the high interest rate need not be a problem. These types of action will help to layer good credit history on top of the previous problems; this is an important consideration as lenders are typically most influenced by recent credit history when making lending decisions.
Obtaining a mortgage after your trust deed
Mortgage lending criteria have become more restrictive for everyone in recent years (irrespective of whether or not a trust deed has been in place). Despite this, there are steps that can be taken that will help you to obtain a new mortgage in the future.
It is very important to ensure that your credit record has been cleared-up (as previously described) in the period after your trust deed discharge. It is equally important that you work to establish a strong record of properly managing some lines of credit after the trust deed is finished.
The next step is to save up the very biggest deposit that you can. Once your emergency fund is in place you should find that you have capacity to save towards a mortgage deposit. At the time of writing it is extremely unlikely that you will be able to buy a property with the type of small deposit (such as the 5% or 10%) that might have been possible a few years ago. This applies to anyone seeking a mortgage, but is even more relevant for people with less than perfect credit histories.
The passing of a little time while you save for a deposit will be to your advantage. The longer it is since your trust deed started, the better your chances of securing a mortgage (and the better terms any such mortgage is likely to be offered on). Six years after your trust deed started it should no longer be visible on your credit record at all.
It is very important not to build up new unsecured debts. Any amount of unsecured credit will reduce the amount that a mortgage lender is prepared to advance to you due to the “affordability” calculations that they must now factor into their lending decisions.
Consulting a specialist mortgage broker is also an important step. They have access to mortgages from companies that you have probably never heard of and will know which lenders are amenable to which kinds of previous credit issues. They understand the amounts that different lenders will advance to you based upon your earnings. Trying to secure a mortgage yourself soon after a trust deed has finished will at best be “hit and miss” and at worst will result in multiple credit checks being run by different potential lenders that risk damaging your ability to obtain a mortgage.
We hope that this information regarding the trust deed closure process, creating an emergency fund, securing your financial future and restoring access to mainstream sources of credit is useful.
Should you require any further information please do not hesitate to ask the experts (and fellow site members) your question in our trust deed forum .
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