From homes to jobs – how ill winds from Wall Street will hit you

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The Independent Online

The collapse of the global investment bank Bear Stearns has lent a new ominous perspective to the credit crisis. While some had dared to believe that the worst was over, yesterday's events made it abundantly clear that chronic uncertainty could continue for many months, and that even the world's largest banks are not safe from danger. Nevertheless, while conditions are continuing to get tougher for UK consumers, credit is still available and the onset of economic recession is by no means a certainty. For those who hold their nerve, and follow a few sensible guidelines, it's still possible to get everything you need from Britain's banks and building societies.

Mortgages & Housing

Getting a mortgage is undoubtedly much harder than it was six months ago – and even though the Bank of England has cut interest rates twice since December, the cost of borrowing is continuing to rise. A year ago, when interest rates were at exactly the same level they are today – 5.25 per cent – the cheapest two-year tracker mortgage, according to the price comparison site www.moneyfacts.co.uk, was offered by Cumberland Building Society at 4.73 per cent, more than 0.5 percentage points below the base rate. Today, the cheapest is offered by HSBC, and comes in at 5.24 per cent. On a £250,000 mortgage, that works out at about £100 more each month.

For first-time buyers, conditions have become particularly difficult in recent months – especially those without a deposit. Until a month ago, it was still possible to borrow the full purchase price of the house, and get an additional unsecured loan worth up to 25 per cent of the new property's value to pay for furniture and moving costs. But all these products have been withdrawn over the past few weeks, while many banks and building societies have also stopped lending any more than 90 per cent of a property's value. People with a patchy credit history will find it very difficult to get a home loan; those who do get a loan are likeley to find that the interest rate on offer is very high. Nevertheless, for the vast majority of people who are coming to the end of a fixed rate mortgage deal, and who now need to remortgage, it is still possible to find the money you need. With far fewer products on offer, it's well worth using a mortgage broker to help find the best deal. London & Country ( www.lcplc.com) and Charcol www.charcol.co.uk both offer a fee-free service.

The tightening in the credit markets is also having an effect on the overall housing market. According to the Nationwide, prices fell 0.5 per cent in February, and are expected to fall faster and further over the months ahead. Whether the market lapses into a full-scale crash depends on how the wider economy, and levels of employment, hold up.

Employment

As the old joke goes, it's a recession when your neighbour loses his job, but it's a depression when you lose yours. The jobs market is the key to whether the UK economy can escape the worst effects of the credit crunch. Unemployment, and the fear of it, kills confidence. This is what went wrong in the economy during the last recession, in the early 1990s, when the property market and consumer spending collapsed, creating their own downward dynamic. Now it is pushing America into recession.

So far, Britain's performance has been relatively strong: The number of unemployed, the unemployment rate and the claimant count have all fallen. Indeed, the number of people in work is at its highest since the modern series of statistics began in 1971. But the more forward-looking surveys on employers' intentions paint a more sombre picture.

Unsurprisingly, businesses in the City are gloomiest about future prospects, and the longer the credit crunch drags on the more jobs will be lost in the financial services sector, concentrated in London and the South-east. More broadly, the UK's exceptionally flexible labour market and moderate wages growth should protect businesses, investment and employment from too much harm. But high inflation and a squeeze on living standards feeding through to higher pay demands could put that at risk.

Pensions & Investments

The credit crunch has played havoc with the world's stock markets. Yesterday alone – following the news of the cut-price takeover of Bear Stearns – the FTSE 100 fell by almost 4 per cent, and since the highs of last summer it is now down almost 20 per cent. The same story has unfolded in the US, Europe and Japan – although emerging markets such as China have proved much more resilient.

The carnage in developed markets has wiped billions of pounds off UK pension funds, and some retail investment funds – which held large positions in the banking sector – have also been badly hit. However, long-term investors with a well-diversified portfolio should not be worrying.

Although developed stock markets have been falling, commodity prices have continued to soar in recent months, while corporate bond investors have also seen a sharp rise in yields. Investors in these asset classes will have done very well so far in 2008. Anyone nearing retirement should already have transferred most of their pension money away from equities. For those who have 10 or more years to go, now is the time to sit tight and keep making your monthly contributions. Continuing to drip feed new money into a falling market ensures that you are buying stocks when they are at their cheapest.

Credit cards & loans

Just as mortgage lenders are becoming increasingly reluctant to lend to all but those with squeaky clean credit records, credit card and personal loan providers are also now cherry-picking their new customers, as well as cutting levels of risk within their client portfolio.

As a result, millions of people have had the limits on their credit cards slashed, sometimes by as much as 90 per cent. Others, such as 161,000 customers of the internet bank Egg, have been told their accounts are being closed.

But for those with a good credit score, it is still possible to get credit at cheap rates. Lenders such as Moneyback Bank and Barclaycard are offering personal loans for as little as 6.7 and 6.8 per cent APR respectively. Virgin Money, Abbey and even Egg are still offering 0 per cent balance transfer deals on credit cards, with no interest to pay for over a year.

Unfortunately, if you're refused a loan or credit card, it's often difficult to find out why. In these cases, it's worth checking your credit file, using sites such as www.creditexpert.co.uk or www.equifax.co.uk, to see if there's any reason for rejection. To find the best personal loan and credit card deals, visit www.moneyfacts.co.uk or www.moneysupermarket.com

Savings

The other winner from the credit crisis has been the savings market. As banks have struggled to raise the money they need in the capital markets, they have been forced to offer more attractive savings rates, to try to persuade more customers to put their money with them.

As a result, it's now possible to get rates as high as 6.5 per cent on instant access savings accounts – one and a quarter percentage point above the Bank of England base rate. Alliance & Leicester is even offering a rate of 10 per cent for cash ISA customers who also switch their current account.

It's important not to save more than £35,000 with one provider, however – unless it is the Government-backed National Savings & Investments or Northern Rock. Although the Government has strengthened the Financial Services Compensation Scheme – which protects consumers if banks goes bust – it only promises to guarantee the first £35,000 of any savings.

Inflation

The effect of the credit squeeze on prices is hard to gauge. The only direct effect will be to make credit more expensive, especially for less credit-worthy customers of the banks, though the Bank of England's programme of interest rate cuts may mitigate that to some extent. So, for some, overdrafts, car loans and mortgage repayments will cost more to arrange than was the case in the past. More widely, the squeeze on investment and consumption that comes with a credit squeeze will tend to depress demand and dampen inflation. Business plans are cut back; consumer promotions postponed; holidays and meals out curtailed. However, there would have to be a truly catastrophic collapse in demand to push back the current round of increases in oil and other commodities such as food.

The most likely result of the credit squeeze, therefore, is for the economy to suffer from stagnant output and from inflation at the petrol pumps and the supermarket – and a return to the "stagflation" last seen in the 1970s.

Tips to help you survive with your finances intact

* Check your borrowing. Take a look at all your credit card, loan and mortgage borrowing, and make sure you're getting the best possible rates for each. Sites such as moneysupermarket.com and moneyfacts.co.uk will help you search for the best mortgage, loan and credit card deals. Once you've done that, get to work on paying off your debts as quickly as possible.

*Make sure you could still afford your mortgage if you were to end up on your bank's standard variable rate (SVR).

If conditions get worse, some borrowers may find that they're unable to remortgage when their fixed-rate deal comes to an end, in which case they'll be forced to stay with their current lender on its SVR.

*Take advantage of high savings rates. If you haven't moved your savings within the last six months, the chances are you could get a much better deal by taking them elsewhere. The best instant access accounts on the market now pay interest of 6.5 per cent. Furthermore, if economic conditions worsen over the next year, it makes sense to have a good pot of savings in case you find yourself out of work, or being forced to pay higher interest payments.

*Get protected. If you've got a wife and children who depend on your income, or are saddled with high debts, it may be worth buying an income protection policy to cover you in the event that you lose your job or are unable to work due to ill health. If you have a family, you may also want to think about getting life insurance so that your mortgage and debts can be paid off if you die.

*Hold off buying a house. Although you may be impatient to get a foot on the housing ladder, it's a risky time to buy, especially if you've not got a sizeable deposit.

If you're putting up less than 20 per cent of your new home's equity, you should be prepared for the possibility that house prices will continue to fall, and you could be left in negative equity. This may stop you selling your property when you want to. In the early 1990s, many people were trapped in their first homes for years, after house prices collapsed.

*Invest wisely. Stock markets are likely to remain volatile over the months ahead, so be sure to keep your investments well diversified.

James Daley

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