From mortgages to savings and shares: how to survive the credit crunch

Keep an eye on your plastic and overdraft, writes Julian Knight, but don't fear going the same way as Northern Rock
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The crunch is on and is affecting savers, borrowers and investors in their thousands.

It has already taken a wrecking ball to Northern Rock. So how can you make sure that it doesn't do the same to your personal finances?

Mortgage borrowers

Despite the Bank of England announcing last week that it would inject £10bn into the money markets, it is still more expensive than normal for banks to borrow off each other and this extra expense is being passed on to borrowers. Abbey and the Halifax have raised the rates on some of their mortgage products, as have a host of smaller lenders.

But Andrew Montlake, director at mortgage broker Cobalt Capital, is upbeat. He suggests there may be better news for mortgage borrowers longer term.

"The turmoil of the past few weeks means the next move in the bank base rate is very likely to be down, from its current 5.75 per cent. This will create downward pressure on the rates in the money markets and this will feed through to mortgage rates eventually."

As for borrowers looking to switch mortgages now – among them, perhaps, some of the 250,000 people whom Nationwide estimates will come off a cheap fixed-rate deal before the end of the year – Mr Montlake recommends mortgages that track the base rate. "This is likely to fall and as a result so will the mortgage repayments of anyone who has a product that is tracking it.

"Remortgaging doesn't seem to be getting harder," he says. "Lenders are still writing new business and some are offering deals where there are no arrangement or legal fees."

Cards and overdrafts

People who are at their credit card or overdraft limits are potentially the most vulnerable to the crunch.

"It may not have had the same attention as what's happening with mortgages, but people with this type of debt are at serious risk unless they take action now," says David Kuo, head of personal finance at the advice website Fool.co.uk.

"Banks can call in an overdraft at any time. As for credit cards, I expect some players will start cutting people's limits soon; you could face having to repay a lot of money very fast.

"Therefore, make plans now and start to pay down your credit card or overdraft," adds Mr Kuo.

Savers

The credit crunch isn't bad news for everyone. At present, savvy savers willing to scour the market can find a good deal.

"Savings rates are going through the roof as banks try to attract extra cash so that they can continue to offer loans and mortgages," says Mr Kuo.

He adds that it is a perfect time for people to build a big "rainy day" fund in case the crunch leads to an economic downturn.

Some banks are offering savers close to 7 per cent on fixed-rate products, but Lisa Taylor from financial information group Moneyfacts thinks this bonanza will be short lived.

"This is actually costing them money and is evidence that they are trying to repair their short term liquidity. Once they get enough money in, these offers are likely to disappear."

Shareholders

Stock markets don't like uncertainty and there is a lot of it about at the moment.

"It is really hard to know how this is going to pan out. For example, is Northern Rock the start or the end of a process and will other banks end up having to go to the Bank of England?" asks Mark Dampier, research director at independent financial adviser Hargreaves Lansdown.

"The next few months are going to be very tricky. But there is some good news out there: central banks are going to lower interest rates because of the crunch and this will help bolster economic growth. And don't forget China: the economy over there is still going gangbusters and this could drive stock markets up," he adds.

Nevertheless, it is possible that Britain's benchmark FTSE 100 index will record a fall during the 2007 calendar year.

But Mr Dampier says we should think ahead. "Sensible private investors ignore the short-term noise. They work on a time horizon of 10 years and feed cash gradually into the market to even out the peaks and troughs of performance."

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