The Credit Crunch Hits Home
June, 18, 2008
The Credit Crunch is hitting hard, affecting everything from mortgages to interest rates, property prices to personal loans. Everyone is feeling the effect on the economy.
So what exactly is a Credit Crunch?
Put simply, it’s when cash is in short supply. Cash-flow is the lifeblood of business, and the crunch means that banks and investors have become reluctant to lend to businesses. This pushes up the cost of loans and mortgages for borrowers as they seek to recoup losses.
With that in mind, SaveBorrowSpend explores how the Credit Crunch is affecting every one of us.
Home Owners
As banks continue to be wary of lending to each other, homeowners are bearing the brunt. The market is being stifled as insecure banks hang on to their cash, exacerbated by the LIBOR (the rate at which banks lend to each other) which is at a record high.
So how are mortgage holders being hit?
This week Nationwide increased its mortgage rates by a half a point for the second time in a fortnight. If you have a 5% deposit you will now pay nearly 8% for a new deal. Woolwich; the mortgage arm of Barclays, has temporarily stopped offering the most popular type of mortgage by withdrawing its two year fixed-rate deals.
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Financial data compiler Moneyfacts claims the average cost of a two year fixed-rate mortgage now stands at 6.75% - a ten year high and the experts all seem to say the situation is likely to get worse before it gets better.
This is a problem across the market - at least fourteen lenders, including RBS and the Halifax increased the cost of various fixed-rate deals last week.
If you took out a two year deal in the Summer or Autumn 2006 you have probably being enjoying a rate of around 4.5%. Now as you scramble about for a new deal you are realistically looking at a 2% hike. For those forced onto their lenders standard variable rate payments could rise by several hundred pounds a month.
The homeowner is suffering: if soaring mortgage repayments weren’t enough, all the latest figures point to falling house prices across the UK and negative equity is on the cards for thousands.
The Housing Market June 2008
But spare a thought for the First Time Buyer who should be benefiting from falling prices but stands little or no chance of getting a deal at all. Although prices are going their way, the sheer prohibitive cost of borrowing is frustrating them getting a toehold on the ladder, further depressing the market.
Food, Fuel and Inflation
Inflation now stands at 3.3% (well above the Government’s target of 2%) and the highest level since 1992. Given this fine economic balancing act of controlling inflationary forces, this means any hope for a cut in mortgage rates has been dashed. Bank of England Governor Mervyn King is warning inflation is almost certain to rise to more than 4% in the autumn.
Inflation is being pushed up by food, drink, fuel and energy costs. It’s clear to see when you fill up at the petrol pumps, pay your bills and do a weekly shop that everything is costing more.
Here’s just a glance at how far some prices have risen in the past year:
Food prices in general up 8%
Eggs up nearly 40%
Butter up more than 30%
Bread up nearly 15%
Petrol has soared by 18%
Electricity up nearly 10%
Gas up 7%
Life is particularly tough for diesel users with the AA reporting this week that diesel has risen 7.39p a litre in just four weeks and now cost an average of 131.56p a litre.
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Pay Rises
There was a dramatic end to the Shell tanker drivers’ strike this week when they won an inflation-busting 14% deal over the next two years (Taking their average salary to an enviable £42,000). You may think this means very little to you, but the deal comes as the Government is desperately trying to keep control of public sector pay rises.
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With inflation higher than expected there are fears hundreds of thousands of public sector workers could be set to tear up current pay agreements. Unison is calling for the reopening of the pay deal for health workers, only agreed a fortnight ago!
Gordon Brown for his part has ordered a pay freeze for all ministers and the Bank of England Governor is urging employees not to react to their lower spending power by demanding substantially more pay. Minister, Yvette Cooper has also asked top City bosses to show restraint, as boardroom pay rises have also been inflation-busting despite the economic situation.
The fear is that widespread pay awards, such as the one the tanker drivers have won, could lead to the kind of prices and wages spiral last witnessed in the 1970s.
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The harsh reality is that people need to realise they are just going to have less money to spend. So sit tight, spend less, struggle to meet the mortgage payments and walk rather than drive.
Most of us aren’t even in the position where we can downsize and move somewhere cheaper... there’s little movement in the market and we may struggle to sell. Even the mega-rich are being affected, with news the Non-Doms who wanted to escape Britain are struggling to sell their multi-million pound properties in the capital. I’ll be shedding a tear for them as I buy my bargain brands at Aldi this weekend!
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SaveBorrowSpend Philippa Adam
