Top Tips for Turbulent Times

January 23rd, 2008

The past few days have made it abundantly clear that we are entering a period of intense economic turbulence. They have shown equally clearly, however, that for the moment survival is a matter of taking a few simple steps.

It sounds like pathetically obvious advice but it is nevertheless true. Keep your job. Be proactive, and ask your boss or do your own research. If you know what the challenges are, you won’t be seen to be heading off in the wrong direction if the company decides it needs to change. Now is also the time to be positive and enthusiastic.

Unless you are close to retirement, there is no need to worry about investments, advisers say. Over the long term, the stock market will rise again by enough to cover this week’s losses. However anyone hoping to cash in their shares soon may be better off taking their money out now and switching to safer cash or fixed interest assets in case things get worse.

Anyone struggling with their monthly mortgage bills should consider switching from capital repayments to repaying just the interest on the loan. A lender will charge £50 for the switch, but it could shave hundreds off monthly outgoings. But this should be a short-term measure as failing to resume repaying the capital means your risk not being able to pay off the full loan at the end of term.

Unfortunately, those about to draw their pension will be the hardest hit by this downturn. Most pension funds invest in the stock market, which leaves them especially vulnerable. The insurance analyst Aon Consulting said that the pension funds deficit rose by £15 billion on Monday. Anyone in, or approaching, retirement is advised delay drawing on their pension fund if they can

The good old solution to higher bills is simple budgeting. The debt charity Credit Action suggests drawing up a list of everything you spend to see if money is going on anything unnecessary. Say goodbye to takeaway coffees, and make your lunch at home instead of buying it at work. Be stricter with yourself and check your direct debits in case you are paying for anything you have forgotten about, such as magazine subscriptions or regular charity donations. If you have debt on credit cards or personal loans, switch to deals with the cheapest interest rates

Property prices are already wobbling, with the least pessimistic commentators predicting stagnant prices for the rest of 2008 and even into 2009. The worst fate, as nervous buyers steer clear in such a downturn, is to become a forced seller. To ward off a forced sale, all homeowners should, take care with debt. First-time buyers, on the other hand, may now be in their best position for years.

It may be stating the obvious, it may be preaching to the converted, but these tips could prove vital to staying afloat in the troubling times ahead so ignore them at your peril.

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How not to manage an economy

January 22nd, 2008

It seems that following the special treatment of Northen Rock by the Government, other banks are keen to get in on the action. Banks and mortgage lenders are raising pressure on the Bank of England and the Treasury to help them raise funds to provide homebuyers with loans, warning that without support the level of lending will plummet.

Industry groups such as the Council of Mortgage Lenders, the European Securitisation Forum and private banks have urged the UK authorities to back the securitisation industry, the sector that enables bankers to turn loans into bonds and other instruments. In effect, they are asking the government for support of the kind it has offered Northern Rock in a bid to sell the loans made to the stricken lender since the bank run in September.

On current trends, industry experts estimate that the outstanding values of mortgages in the UK will rise by £90 billion in 2008, but new deposits from retail and institutional customers are likely to reach only £60bn. Without the securitisation market reopening, mortgage providers fret there will be a £30bn lending shortfall – potentially enough to force lenders to slash the amount of loans they can provide to households, putting a serious dent in the economy.

Sir John Gieve, the deputy governor of the Bank of England accepted the potential severity of the situation in a speech last week, when he said the disruption in the UK banking system “brings a risk of a deeper downturn”.

In the US, mortgage lenders have been able to offset similar pressures by using the loans they hold on their books to raise funding from the Federal Home Loan Banking system, a state-supported institution that has extended about $750bn (€514bn, $384bn) of loans to lenders in recent months.

However, importing such ideas faces stiff resistance from many UK officials. “Taking the easy option and giving in in the short run without looking to the long-run consequences of those actions is damaging,” said Mervyn King, the Bank of England’s governor. Any public sweeteners would require central government’s agreement, but the Treasury indicated it wanted the industry to find a market solution.

The problem is that banks are likely to seize on the government’s plan to underwrite the securitisation of its loans to Northern Rock, in effect making the loans risk-free. They can argue that if the public sector can help one lender, it should provide similar support for others. In other words, if the mistakes of Northern Rock can be solved by a cosy stitch up with Gordon Brown, why should other banks not try the same thing. This seems to have been a factor forgotten by Brown in his hasty arrangement of a deal that attempts to salvage his reputation for economic competence by simply moving the problem to the other side of a general election.

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Trans-national borrowing is just around the corner

January 19th, 2008

Shocking news from Brussels; it seems that the EU is actually doing something useful for a change. MEPs have backed new rules to standardise lending conditions and make it easier for EU consumers to borrow money across borders.

At the moment, borrowers looking for a loan to buy a car or a television can only get credit in their own countries. The new idea is to allow consumers to compare loans in different states in the European Union.

Two-thirds of EU consumers use credit to make big purchases, whether paying for a wedding or a washing machine. And lending conditions, including interest rates, the terms for early repayment, and the right to cancel, vary widely across the EU.

The average interest rate varies from 6% in Finland to 12% in Portugal, according to the European Commission. In Italy, consumers pay 9.4%, compared with 6.8% in the Irish Republic. At the moment, the EU consumer credit market is worth 800bn euros (£600bn) a year, but only 1% goes across borders.

Under the consumer credit directive, annual percentage rates (APR) will be calculated in the same way across Europe making the market more accessible and transparent.

The directive covers consumer loans between 200 euros (£150) and 75,000 euros (£56,000) on which interest is paid. It will not apply to deferred payment cards, such as credit cards and store cards. And it will not cover mortgages or overdrafts which run for less than a month.

Once consumers have negotiated a loan, they will have a 14-day cooling-off period in which they can cancel without having to give a reason and without any charge.

Fewer than half of EU countries give consumers this right at the moment. Borrowers will have the right to pay off loans early. Lenders will be able to charge them only 1% of the amount paid off early in compensation. For loans with less than a year to run, compensation to lenders is capped at 0.5%

This legislation is the first piece of good news about the loan market for several weeks, although it will take a while to come into force, member states will have two years to transpose the directive into national law. Shopping for a loan will then become a much more international affair than it is now and a diverse and competitive market can only be a good thing for consumers.

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