What the Lehman collapse means for us all

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The Independent Online

Borrowers

The collapse of Lehman Brothers is confirmation that the credit crunch is far from over. Although mortgage rates have been coming down, there is now every chance they will start to rise again as banks grow nervous about lending to each other once more.

Yesterday, the overnight Libor rate – the rate at which banks lend to each other – jumped from just over 5 per cent to almost 5.5 per cent, having fallen all the way from highs of about 6.75 per cent last summer. Mortgage rates may well start to move in the same direction before the month is out. So, if you're thinking about getting a home loan any time soon, it may be worth getting your application in as soon as possible to secure the best rates.

You are also likely to need a good credit rating and a big deposit to get the best deals. While lenders such as Nationwide and Abbey will lend up to 95 per cent of a property's value, they will charge you much more.

Savers

Lehman Brothers is an investment bank, whose clients are institutions, not individuals. However, its collapse shows that the banking sector as a whole is still vulnerable, and it is not impossible that another retail bank finds itself in the situation that Northern Rock did. If another high-street bank went bust, savers would have the first £35,000 of their deposits guaranteed, but beyond this they could lose everything. Hence, if you're sitting on a larger amount of savings, you might want to consider spreading it around a few different banks – or putting it with Northern Rock or National Savings & Investments, both of which are fully backed by the HM Treasury. The good news for savers is that nervousness in the banking sector may keep savings rates high. As long as banks are struggling to raise new money from each other, they are sure to continue offering great savings rates, to try to boost their capital positions.

Investors

For the small number of British individuals that held shares in Lehman Brothers, their investment will now be all but worthless.

For most people, however, the effects of Lehman's collapse will be felt in a less direct manner. Global stock markets fell sharply in reaction to the news yesterday. If you are investing for the long term, make sure your portfolio is well diversified, and sit out the storm. If the market continues to fall in the short term, you can take comfort that by continuing to make your monthly contributions, you are buying more shares for your money.

If you are investing for the short term, then hopefully you don't have all your money invested in equities. If you do, it may be worth visiting a financial adviser to help provide some diversity for your portfolio. To find an adviser in your area, visit www.unbiased.co.uk.

Economy

Lehman Brothers employs some 25,000 staff worldwide, of which about 5,000 are in the UK. Most if not all of these will be out of a job after yesterday. On a wider scale, the collapse of another bank will create a further drain on liquidity in the capital markets, meaning that banks remain reluctant to lend to individuals. Britain's economy had already ground to a halt by the end of the second quarter this year, and looks increasingly likely to record its first quarter of negative growth in 18 years between July and the end of this month. The financial services sector accounts for about 10 to 15 per cent of GDP and, as the collapse of Lehman Brothers has shown, this sector is shrinking rapidly.

House prices

A prolongation of the credit crunch can only mean more bad news for house prices. Lehman's collapse is certain to reduce the amount of capital available to banks, which in turn will reduce the amount of money which lenders are willing to advance to UK homebuyers. Although house prices have fallen by about 10 per cent over the past year, the sharper drop in mortgage approvals since the start of the year would suggest this is only the beginning. Some economists are predicting that prices will fall by more than a third from the top of the market last year. Anyone needing a mortgage will continue to need a large deposit and a good credit history to get the best rates. Alas, the Chancellor's move to recently increase the 1 per cent stamp duty threshold from £125,000 to £175,000 is unlikely to be incentive enough to tempt first-time buyers back into a very difficult market. For those who bought a property close to the top of the market last year, and are now in negative equity, it may be tricky to secure a new mortgage deal when your current one expires.

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