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6 steps to surviving the credit crunch
Article 2008-03-18, 06:38:00
Take control of your finances now
Experts say the current turmoil in the financial markets could take years, not months, to unwind. So the message is clear: take steps to batten down the hatches now, because we could be in this for the long haul.
Here are some straightforward steps we can all take to protect ourselves during the credit crunch.
1. Cut down on your spending
The first and most simple step is to trim your spending. Cut out all the "empty" expenses that gnaw away at your financial security and you'll be better placed for the tougher economic climate.
The cost of living has already gone up - and things are likely to get worse before they get better. Last summer, Premier Foods, the group behind Branston Pickle, Oxo, Mr Kipling and Quorn, talked of a "systemic change" in world ingredient markets, with "violent rises" in many commodities.
Since then the price of top-quality wheat has soared - jumping 25% in one day alone last month - to a record high. And there have been newspaper headlines forecasting "panic" at the supermarket check-outs, as families struggle to afford the cost of the most essential of foodstuffs.
As cash is the most risk-free asset we have - immune from most factors, except inflation - it's vital to spend it wisely. Postpone large, non-essential purchases, and trim your outgoings wherever you can. One quick and easy way to save money is to make sure you have the best deal on your utilities.
2. Get your debts under control
We're already fast-becoming a nation of debtors. And that's especially bad news if we are heading for a recession.
Figures show that 6.5 million people have been forced to consolidate their debts in the past three years in a bid to keep borrowing under control, and some 1.29 million of them have unsecured debts of more than £20,000.
Not only is that level of debt a serious problem in any circumstances, it is crippling in times of economic uncertainty when peoples' homes and livelihoods are put on the line because of years of uncontrolled spending and borrowing.
If you're in a similar position, the first step is to do everything you can to start paying your debts off. Every month that goes by those credit card balances are costing more and more money. Think twice before using your credit card on day-to-day spending. The average standard rate on purchases has increased from 16.72% to 17.01%.
If you're someone who doesn't clear their balance in full every month, switch to a 0% rate credit card and make a concerted effort to do so, before the interest-free period ends. If you know you're going to need longer than the nine or 12 months the lender gives you, switch the unpaid balance to a 'life of balance' low-rate credit card that gives you as long as you need to clear the sum.
Think twice too about consolidating your debts and adding them to your mortgage. If we are heading into a recession, then the threat of negative equity will become all too real. If the value of property falls, as many are forecasting it will in the short-to-medium term, then homeowners who take on too much secured debt could risk losing the roof over their heads.
3. Make sure you're on a competitive mortgage deal
Borrowers of all sorts are paying the price for the credit crunch and as your mortgage is most likely to be the largest single debt you'll ever have, it's crucial that you constantly review it in the current climate to make sure that you're getting the best deal.
The assault on the homeowners' pockets has been tremendous in recent months. Lenders have been pulling cheap deals, cutting the maximum percentage of a property's value they are prepared to lend and refusing more and more mortgage applications as they perceive greater risk among borrowers.
Fixed-rate mortgages are the most popular choice with homeowners and at a time of increased uncertainty mortgage lenders are receiving record numbers of applications for fixed-rate loans. It's hardly surprising. If you want certainty, at least when it comes to knowing that the roof over your head is as secure as it can be, locking into a fixed-rate deal is an obvious choice.
Caveat Emptor
However, there are some points to beware of when comparing fixed-rate deals in this new credit crunch era. Firstly watch the interest rate. The average two-year fixed-rate mortgage has risen 0.62 percent in the past 14 months. In January 2007 the typical rate was 5.55%, whereas today it's more like 6.17%.
Secondly, keep an eye on lenders' set-up fees. Some have risen to £1,000, or even up to 2% of the total value of the loan. Fees have been gradually doubled over the past two years and the cost has soared even higher in the past few months.
Thirdly, if you're keen on the "chancellor's favourite" - a 25-year fix - then shop around, because not all 25-year deals are the same. If you want the flexibility to switch to another deal, should the rate prove uncompetitive in the medium term, make sure your lender will let you get out penalty-free. Penalty-free periods vary, from four to 10 years, or not at all, so check out all the deals on offer before locking in.
However, there could be a better solution altogether - discount or tracker mortgages. The Bank of England is unlikely to lift the base rate in the near future because it won't want to make borrowing even more prohibitive than it already is. This means that discount or tracker mortgages may now be the best option of all. They stand to put homeowners in a win-win position; leaving them even better placed if the base rate falls sooner than expected.
4. Make sure your credit record is squeaky clean
Mortgage lenders and credit card companies have become choosy about who they lend to. If you don't have a squeaky clean credit record you could find it hard to secure a competitive deal. So making sure the information held on you is correct is vital.
Your credit report shows who you have credit with and goes back over six years. It also includes a "footprint" of all lenders who've searched your file as a result of you applying for credit over the previous 12 months - regardless of whether you took out credit with them.
If you spot an error, contact the credit provider. You can also contact the credit agency with a Notice of Dispute and ask it to investigate the matter. If the information is wrong the record must be amended, and any lenders who have checked your file in the preceding six months must be informed of the error. If adverse information is correct but there are good reasons for it, you can ask the agency to attach a brief explanatory note.
5. Become a saver, not a spender
There is one clear winner from the credit crunch: savers. Interest on savings accounts has risen an average 1.2% since January last year. And that's in spite of the fact that the Bank of England base rate is the same as it was back then.
While mortgage rates might be at a nine-year high, savings accounts have broken through the 7% barrier. That's because banks want to get as much money through their front doors as they can.
As Northern Rock proved though, banks can, and do, go bust, so if you are worried about the possibility of further bank collapses, do not invest more than £35,000 with any one bank or building society: that's the maximum you're guaranteed to get back if it goes bust.
6. Don't put all your investment eggs in one basket
Diversification is the key to a solid investment strategy in times or stability or volatility, so keep a level head and make sure your investments given you the widest exposure to a variety of different asset classes.
Your overall aim should be to ensure that whatever happens to one particular part of your portfolio, you will have other investments that will counter the effects and level out any volatility.
Balance is best
Financial advisers AWD Chase de Vere recommend a cautious investor holds 63% in bonds, 17% in UK equities, 55 in property and 15% in cash. A more moderate investor should have 30% in UK equities, 22% in bonds, 15% in US equities, 3% in Asia and 30% evenly split between Europe, property and cash.
Pension planning pitfalls
If you're heading for retirement in the next few years, and are convinced we are heading for a sustained market downturn, you may want to consider switching out of equities and into bonds, to protect your fund.
However, if you are a long way from retirement, you could lose out enormously by not having your pension cash invested in equities. History has shown that, over the longer term, shares have consistently delivered better returns than cash. And in periods of extreme volatility, such as now, the returns can be even greater.
Borrowing costs rise despite base rate cuts
Article 2008-03-13, 06:10:00
High street banks cash in as consumers suffer. The highest rate on a £1,000 loan has increased from 19.9% to a massive 27.9%.
The cost of borrowing £1,000 through a personal loan has risen by 4.5% since last March, as the credit crunch has forced lenders to increase interest rates, latest figures show.
The statistics from financial information provider Moneyfacts show the average APRs on unsecured loans of all sizes have risen since March 2007, even though the two recent cuts in the Bank of England base rate have brought it back down to the same level it stood at a year ago.
Those taking out the smallest loans have been hardest hit, with the average APR on a £1,000 loan increasing from 14.4% to 18.9%.
The average APR on a £2,000 loan has increased by 3.9% to 17.9%, while a £3,000 loan now attracts a rate of 15.5% - 3.8% higher than March last year.
Borrowers taking out larger loans are also paying more than those who did so last March, although the gap between rates isn't as large.
On a £5,000 loan average rates have risen 2.1% to 10.1%, while on a £25,000 loan they are 1.2% higher at 8.1%.
"Anyone looking to take out a loan in 2008 is going to find themselves faced with having to shell out more by way of monthly repayments than they would have done over the last couple of years," said Michelle Slade, a Moneyfacts analyst.
"The ongoing credit crisis has seen institutions concentrating on getting money in the door and becoming more expensive and selective when lending money out."
Slade said the highest rate on a £1,000 loan had increased from 19.9% to a massive 27.9%, while some of the keenest rates have been withdrawn.
Last March, Northern Rock was offering a best-buy rate of 6.4% on £1,000 - this year it still offers the lowest rate, but it has increased it to 12.9%.
The outlook is worse for people with imperfect histories, Slade said.
"With 97% of loans offering typical or personal pricing, consumers with less than perfect credit scores may find themselves offered rates higher than those advertised, or declined completely," she warned.
Secured loans have been an option for some borrowers, but they have also become less competitive as a result of the credit crunch, Moneyfacts said.
Eight lenders, including Alliance & Leicester and Picture Financial, have withdrawn entirely from the market in the past few months, while those that remained have cut limits and increased rates.
"In line with the mortgage market, the amount that the lenders are prepared to offer has been slashed. Loans of 125% loan-to-value (LTV) are no longer available and only a handful of lenders will consider 100% LTV loans," said Slade.
"In March 2007 rates as low as 5.9% could be found. Now the best deal on the table is 6.4%."
Moneysupermarket secured loan business booming
Article 2008-03-04, 02:15:00
Comparison site unaffected by credit crunch
Price comparison website Moneysupermarket.com said it has seen a shift towards secured loans after announcing pre-tax profits of £7.6 million.
The parent company of lead generation company Paaleads.com said consumers had moved away from unsecured lending toward secured lending.
Since floating on the FTSE 250 last summer, the company said visitors to the group's sites increased by 54% to 91 million.
Simon Nixon, Chief Executive Officer, said revenue in the money vertical, which includes its loan and mortgage business, increased by 49% to £78 million.
He added: “Growth has been driven by both an increase in visitors of 20% and a shift in sales mix away from unsecured lending towards secured lending products.”
Nixon said sales of secured loans had generated higher revenues for the group.
He added: “The group saw little impact on the reported results from the volatility of the credit markets in 2007.”
According to Nixon other revenues grew by 17% in the period from 22 June 2007 to 31 December 2007, sales of mortgage and loan leads through Paaleads.com and commission based sales through its own advisory business.
It said administration costs had risen after taking on over 100 new staff, largely in its IT and operations departments.
More families put homes at risk as debts soar
Article 2008-03-03, 07:55:00
Think carefully before securing a loan on your home
A massive surge in the number of secured loans means householders are increasingly putting their homes at risk to cope with their debts. There are strong signs that unsecured credit is becoming more difficult to obtain as homeowners are increasingly going for secured loans, which are akin to a second mortgage.
Loan applications by homeowners have shot up from just under 23,000 last autumn to more than 42,000 this winter, according to one financial website.
Whilst it remains common for borrowers to move their credit card balances and overdrafts on to one low-rate loan at this time of year, having run up debts over the festive season, they usually go for unsecured personal loans.
But rejection rates on unsecured loans have shot up by 15% to 20%, forcing borrowers down the secured lending route.
The difference is that secured loans put your home at risk if you don't keep up repayments. For this reason they are often seen as a last resort for borrowers.
When deciding whether to give you a loan, lenders look at how much your home is worth compared to the size of your mortgage, as well as your ability to repay the debt.
Rates on secured loans can be lower than unsecured loans, but they might have high arrangement fees.
First Plus charges 6.4% on a secured loan of £15,000 over five years, but its arrangement fee is £995, whereas Tesco charges 6.8% typically on the same amount for its unsecured loan.
However, those with a poor credit rating will be charged at least double for an unsecured loan: Ocean Finance's rate is 12.2%, Loans.co.uk charges 17.9% and the third cheapest is Citifinancial at a massive 23.1%.
Sean Gardner of MoneyExpert says: 'The majority of borrowers opting for a secured loan are those who cannot get an unsecured loan. Many are looking to consolidate debts and perhaps have a poor credit record.
'Lenders are looking closely at whether you can service your debts out of spare cash and are wary of taking on too much risk.
'Rising energy prices mean there's heavier demand on household incomes, with affordability becoming a significant issue.
'But with a secured loan they have the extra surety of knowing the equity in your home can provide a safety net. Borrowers need to keep in mind they are putting their home at risk.' Even more worryingly, he says the average size of a secured loan is £22,000 - far higher than the £9,000 typically borrowed on unsecured personal loans.
Borrowers need to ensure they are not falling into a vicious cycle of debt. Debt Counsellors are worried that those consolidating their debts on to one large loan will then carry on spending with their credit cards once they've cleared their card debts.
“Third Charge” launched by Private Lender
Article 2008-02-12, 07:22:00
Anthony and Co, a Gloucestershire based lender, had launch a new third charge non status product for customers “who require a top up.”
The product is an extension of the company’s second charge “Mini loan”, which has a maximum loan size of £12,500. Lending will be limited to households with an LTV below 75% with payslips or 70% self cert.
The lender has also scrapped the lender’s reference, consent requirements and could accept any recent valuation without a retype in most cases. They also said they will lend behind most lenders, including bridgers.
Loan manager Jill Bryant said the company dealt with a number of lenders who make out of the ordinary loans.
She said that as lenders capped LTV’s at increasingly lower levels the need for a third charge has become more important.
Egg withdrawal will 'benefit' borrowers
Article 2008-02-06, 02:59:00
Credit ratings will be improved for those with closed accounts
Egg's decision to cut off credit lines to 160,000 customers will not leave a black mark against their names, say leading credit reference agencies.
In fact, it will make those who kept their credit card payments under control even more creditworthy.
This could be the majority of those customers who have just been told their cards are to be withdrawn.
Despite Egg's assertion that only 'high-risk' users were affected, widespread reports over the weekend suggest the cards had been withdrawn from customers who regularly paid off their balance.
The implication is that Egg wants to dump these customers because it cannot make money from them.
However if you are one of these customers, the Egg withdrawal will actually improve your credit rating, according to the credit industry's largest credit reference agencies.
Your credit file does not log whether a card has been withdrawn, but merely charts whether an account is open or closed.
Therefore, if you have a cleared balance, a closed account will be logged as 'settled'.
If you had a high credit limit on your card, any lender checking your credit history will not see the previous level of spending on your card. However they will see that you settled and closed an account with a high limit.
This will improve your rating, which will work to your advantage as credit providers are becoming stricter with their lending following last year's credit crunch and more likely to look at the finer detail of your credit file.
It is also a good idea to close any cards with a cleared balance, as this reduces the number of credit cards that appear on your file and also acts to boost your creditworthiness.
As Neil Munroe, external affairs director of credit reference agency Equifax, said: 'We don't flag up whether an account has been withdrawn; we just highlight whether an account is open or settled. So in some respects, the Egg withdrawal of cards could work in a person's favour.
'We log that you have paid off a credit card balance, which will look good in the eyes of lenders. Also, one piece of advice I have always given people is - if you are rate tarting [switching balances to cheaper cards], you should never leave a card open once you have moved the balance as the lender will only see the number of cards in your name. If you have too many cards you may be seen as too much of a risk.
'The Egg closure may help you also by reducing your card number and therefore increasing your creditworthiness.' A spokesperson for Egg was unavailable to comment on whether more customers will have their cards withdrawn.
Has Egg signalled the end for 'rate tarts'?
Article 2008-02-05, 02:32:00
Borrowers who rely on new deals to maintain a low-interest debt will be hit hard if rivals follow Egg's lead and axe unwanted customers.
The easy availability of credit cards and balance transfer deals in recent years has allowed customers to retain thousands of pounds in credit card debt at low or 0% interest rates.
Some rely on repeatedly taking out new credit cards to avoid repaying debt, while others have taken the cash and invested it in high interest savings accounts to turn a profit - a practice nicknamed “stoozing”.
But internet bank Egg's decision to stop 160,000 customers from using credit cards has set alarm bells ringing for those reliant on a steady stream of new borrowing.
Internet bank Egg, owned by US banking giant Citigroup, has informed 160,000 of its customers that their credit cards will stop working in 35 days' time.
It claims this will affect 7% of its 2m customers, who are being targeted because of a 'higher than acceptable' risk profile. But Egg has seen a massive backlash from customers who say they have good credit histories and have still been told cards will be stopped.
The dramatic move by Egg is the first time a card provider has acted on such a large scale and following the outcry from customers it is unlikely others will undertake the same action.
However, other firms are tightening their belts, with HSBC saying it is turning away half of all applicants for credit cards and Barclaycard blocking some cash withdrawals.
Egg has not told customers to immediately repay outstanding debts, it has simply axed their line of further credit. This should not put customers in hardship, or stop them applying for new cards elsewhere, but has caused many an inconvenience.
Customers who are low risk, but have still had credit axed have accused Egg of using underhand tactics to get rid of unprofitable card users. This is because they either have no balance or pay bills in full every month. Egg has denied these claims and said it is only seeking to curb high-risk borrowing.
However, in both instances Egg's tactics are indicative of a change in mood among banks, as they seek to move away from prolific lending to a more cautious and profitable approach in the wake of ongoing global banking problems.
This tightening of lending could seriously limit the ability of borrowers to repeatedly take out new credit cards and transfer balances to 0% deals.
£7.7bn of Secret Loans
Article 2008-01-31, 07:10:00
Research carried out by Abbey has revealed 1.3 million Brits have taken out secret loans, without the knowledge of their family or partners, worth £7.7 billion.
The research shows the average loan size is £5,720. However 5% of recipients took out loans of between £20,000 and £50,000. 56% of the loans taken out were to cover debts, while 15% were for home improvements and 5% wee for holidays. 2% admitted the money was for cosmetic surgery.
Director of Abbey loans, Paul Morrish, said: “Borrowing in secret – especially large amounts – is not advisable and we would encourage people to be honest and open about their finances.
“Talking about your financial situation with others can help so that you can be realistic about what is affordable.”
He went on to advise borrowers to compare loans on the whole market to ensure they find an appropriate deal.
A million families 'could lose home' in credit crunch
Article 2008-01-30, 08:05:00
Act now to avoid the risks of homelessness
More than one million families are in danger of losing their home over the next 18 months, Britain's financial regulator warned yesterday.
It fears that huge mortgages and other debts will prove a lethal cocktail during the global credit crunch. As banks become more wary, many coming out of a fixed-rate term on their home loan will find they cannot switch to another cheap deal.
Even the smallest increase in bills or repayments will tip some over the edge, according to the Financial Services Authority (FSA).
In the bleak forecast, it said that nearly one-fifth of those who took out a mortgage between April 2005 and September 2007 risk having their property repossessed. This group of 1.04 million includes those who took out their first home loan, and those who remortgaged from one deal to another.
All these customers, who borrowed during a time when property prices were soaring, have two or more of the FSA's three 'high-risk' factors.
The factors are: putting down a deposit of 10 per cent or less on a home; taking a mortgage for longer than 25 years; or borrowing more than 3.5 times the customer's annual salary. The FSA is particularly worried about 150,000 who have all three high-risk factors. They are the most likely to have their homes repossessed, the regulator said yesterday in its annual Financial Risk Outlook.
This would be double the previous record of 75,540 repossessions in the dark days of 1991, according to the Council of Mortgage Lenders. The other 890,000 homeowners are at risk of 'financial difficulty'. This could include repossession or could simply involve missing a monthly repayment or a credit card payment.
Lyndon Nelson, the FSA's head of financial strategy and risk, said it may not be mortgages which 'tip them over the edge'. Other debts such as personal loans, credit cards and overdrafts could cause the problems.
Home repossessions are already rising rapidly, soaring from just 3,700 between January and June 2004 to 14,000 during the same period last year.
Mark Sands, director of personal insolvency at the accountants KPMG, said: 'It is a "drip by drip" problem. An extra £5 on their mortgage, £10 on their council tax bill and so on is really putting the squeeze on people who are financially overstretched already.'
Many homeowners coming to the end of an existing fixed rate deal may not be able to switch to another loan with a cheap rate, and will have to stay on at the much less attractive standard variable rate. Banks and building societies will see them as a high-risk customer.
An FSA spokesman said: 'We are not saying this scenario will definitely happen but we want to raise awareness of the risks. With continuing uncertainty over the economy, it is more important than ever for people to take care of their finances.
'Anyone with debts, including mortgages, should take stock, review their budget and make sure that it is affordable if there is change in circumstances, such as a job loss or a rise in interest rates.'
To make matters worse, the Land Registry revealed yesterday that house prices are falling across the UK, down 0.4% in December. It is the first monthly fall since 2005, with prices falling in seven of the 10 regions of England and Wales.
The biggest loser is the South-West, where prices fell one per cent in a month. The average price of a UK home is now £184,469.
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