The Credit Crunch II: Household and personal finances

5 August 2008

The credit crunch has seeped its way into the budgetary niches of almost every household in the country in one form or another. Here are some of the problems it has caused and some tips on how best to ensure its effects are manageable.

Mortgages

In one respect, the credit crunch, whether or not its journey is yet over, has already travelled a full circle. Starting in the US sub-prime mortgage market, and taking a route via international structured debt products, it has now arrived full square in the UK’s own mortgage market. Its most obvious impact has so far been to make mortgages both more difficult to find and more expensive. In fact, loans and credit of almost every description.

New mortgage agreements are at an all-time low. According to the Bank of England, new home loan approvals dropped by a massive 68 per cent in the year to June 2008. In June alone, approvals stood at just 36,000 compared with the 114,000 that were agreed by banks and building societies in June 2007. Where applicants are not being turned down, some first-time buyers and those with less than spotless credit histories are being offered deals that hover around the 11.5 per cent interest rate mark.

Rises in interest rates mean that some home owners are now finding that mortgages are swallowing ever greater proportions of their income, accounting, says the Council of Mortgage Lenders, for as much as 18.8 per cent of average earnings in certain cases. In the early 1990s that figure stood at about 10 per cent.

Credit cards

All the while credit card companies have been busy reining in credit limits and declining new applications by the postbag full. As long ago as last December, Barclaycard was reported as refusing a half of all applicants and lowering the spending ceilings on some 500,000 existing cards.

Stock markets

The credit crunch has taken a double bite out of the stock markets. Major investors have been selling shares or betting on falls in their value; smaller investors have been shying away from the turmoil of flip-flopping stocks altogether, preferring instead the calmer harbour of high interest savings accounts.

Inflation

As if the credit crunch of itself were not applying enough pressure on personal finances, it has come riding on the back of rising commodity prices. You would need to have spent the last year living on a Himalayan outcrop not to have noticed that the cost of petrol at the pumps has galloped, while energy (gas bills are being threatened with a 30 per cent rise) and food, too, have become increasingly expensive.

Managing your personal finances

While few individuals are in a position to escape the reach of the credit crunch, there are a series of practical steps that can be taken to limit its impact on household budgets.

Planning

There is nothing quite like being forewarned to be forearmed. So, wherever possible, anticipate likely increases in household spending even before the statement or the bill lands on your mat. Allow for hikes in mortgage interest payments; allow for a rise in fuel and energy bills; allow for extra food budgets.

Expenditure

To accommodate such allowances, take a microscope to your household spending. Examine every outgoing and decide whether it is really necessary. While delaying the purchase of a new plasma television looks like a saving (remember, it’s money you haven’t yet actually spent), cutting back on some smaller daily outlays – is every car journey necessary? – can amount to a considerable reduction in costs when taken across a whole year. Interrogate each direct debit (they tend to get overlooked because they require no action on your part) and then review how essential it is. Utility bills may be rocketing, but it is possible to offset some of the extra cost paying by direct debit and making use of the discounts suppliers offer for this method of bill settlement.

Debt

In times when money is in shorter supply it is also more expensive. So try to avoid any kind of debts. If you do have credit cards, pay off as much as you can afford each month and pay on time. Credit assessment is becoming ever tighter in its scrutiny, and late payments on even something as innocuous as a mobile phone can have an adverse effect on your rating.

Loans

Should you find that you must take out a loan, settle down with a calculator first and do some maths. Never borrow more than you actually need to and always work out exactly how much a loan will cost you over the full span of its life (loans with the lowest total amount repayable are the most cost-efficient). And then budget for it.

Tax

Tax, like a mortgage, is a priority payment. Always make sure you have set sufficient sums aside to meet any liabilities you will face. If you are unsure about your future tax bills, talk to us.

Mortgages

The good news is that house prices are falling. The bad news is that mortgages come with more exacting loan conditions attached. Although the base rate has held steady at 5 per cent since April 2008, the costs of fixed-rate and tracker mortgages have been on the increase. First-time buyers without reasonable deposits and clean credit records may struggle to find a suitable loan; those with should brace themselves for some challenging interest rates. Home owners who are thinking of moving will not be treated quite so punitively.

One certain consequence of the credit crunch, however, has been the rise in mortgage arrangement fees, which have soared. Any decision to move will need to take these costs into account (though, with house values dipping more or less across the board, they may in part be offset by a reduction in the amount of stamp duty payable on the new property).

Savings

While interest rates may be hurting some mortgage payments, they make it a good time to save. Competition among banks and building societies for customers has pushed savings rates to their highest level for several years. Some rates were as much as 1.3 per cent higher in July 2008 than they were in December 2006 when the Bank of England’s base rate was also at 5 per cent. A recent study by Moneyfacts found that fixed-rate bonds could produce a return of 7.15 per cent on savings compared with a rate of 5.85 per cent in 2006. Even no-notice savings accounts have shown a 1.1 per cent rise to 6.4 per cent for the best rates available during the past 18 months.

Investing

The stock market is a volatile place at the moment. The understandable instinct of many smaller, non-institutional investors has been to shun stormy equity markets and head for the tranquility of savings accounts. The Building Societies Association reported that cash deposits during 2007 reached £16 billion, almost double the 2006 total of £8.3 billion. Scattered across the City are the burned remains of once stable and lucrative investment sectors – banking, property, construction and retail.

However, amidst the tumble and slump of many prices, a number of well-structured, well-funded companies have taken hits that were not of their own making, their share values unfairly punished for the shortcomings of others, and are still worth investigating. Of course, now is not the occasion to plunge heedlessly into equities; but nor is it also necessarily the time to sell recklessly and crystallise loses. Over the longer term equities usually perform profitably, and periods of uncertainty may be the opportunity to review a portfolio and to realign investments. Taking professional, expert advice is, however, essential.

Guiding and husbanding personal finances through the credit crunch may not be easy, but, with careful management, it is possible to emerge intact. And the crunch, like all financial phenomena, will, one day, pass.

If you would like help in planning your personal finances or your tax, please don’t hesitate to contact us.