Surviving Credit Crunch

The impact of the credit crunch has now caused the UK to enter into an official recession, with economic output falling 0.5% in the last 3 months. The Credit crunch is now not just hurting the housing market, but the wider economy.

Major effects of the credit crunch

• Difficult to borrow, especially difficult to get mortgage.
• Bank of England cutting interest rates is leaving us with negative real interest rates. Inflation currently 5.2%, interest rates 4.5% (and interest rates likely to fall to 3% soon
• Recession, causing unemployment to rise
• Lower real incomes. Workers accepting pay rises below or close to inflation to protect jobs.
• Falling Stock Markets

How To Survive Credit Crunch

• Don’t worry about buying a house. Prospects for buying a house will probably be much better in 12 months, when house prices have stopped falling. The next 12 months is an opportunity to save for a deposit if possible. In the current mortgage climate, it is even more important to save for a deposit, to enable a better mortgage rate.
• Keep a track on Savings. Although we have negative interest rates. Banks are keen to improve their balance sheets so are offering attractive rates for savers. Northern Rock, Abbey National and Halifax all are offering saving rates above the base rate. This is a way to protect the real value of your savings.
• Worried about safety of Banks. My advice is that if the bank / building society is British, your savings are as safe as you can get.
• Investment diversification. If you own shares you will have seen the value of your share portfolios fall. However, on long term price to earnings ratios, share are good value. They may continue to fall in the short term, but, in the long term, are liable to rise. Amidst the uncertainty, many are buying into gold stocks.
• Remortgage. Just because it is difficult to get a new mortgage doesn’t mean you shouldn’t continue to try and get the best mortgage deal. Even now, the benefits of remortgaging and avoiding your bank’s standard variable rate is as great as ever. (Checklist for remortgaging)
• Paying off Debt. Levels of personal debt in the UK are at an all time high. (See: Debt levels in UK) We are now waking up to the necessity of reducing debt and increasing our savings ratio. The current low rates of interest should be seen as an opportunity to pay off more than the minimum payments. Remember, even if interest rates fall to 3%, they could easily increase to 6% within a couple of years. Avoid the temptation to take on more debt because interest rates are so low. As usual, it makes sense to pay off the highest interest rate paying debt first. (10 Tips for paying off debt)