How to ride out the credit crunch

No longer safe as houses The housing market appears to be stalling, with price inflation, the massive £1.3 trillion in personal debt amassed by Britons and the new-found caution of lenders all paying a part – up to 400,000 people were refused for mortgages in 2007, while the number of people having their homes repossessed rose 30 per cent in the first six months of the year.


If you are one of the thousands whose cut-price, fixed or special starter mortgage deal is coming to an end in 2008, it’s unlikely that you’ll get away without paying more than you have in the past – and you should try to factor the extra hundreds or even thousands of pounds into your budget. Remortgaging and equity release schemes are also likely to be vulnerable, especially as house price growth has slumped in recent months, so you can no longer bank on price increases to get you out of trouble. One more thing to watch out for is high application or set-up fees that lenders have introduced to claw back some of their losses. One specialist website reports a 46 per cent rise in mortgages with an application charge of more than £1,000. Even so, for those with substantial savings, a good job and an excellent credit report, all these hiccups could make 2008 a good time to buy. Watch out for city centre flats, where supply is outstripping demand and developers are willing to discount heavily. See your free Experian credit report now – and set your finances in order for 2008.



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Are your finances maxed out?

Most people fall into debt through no fault of their own. The monthly budget can be jogging along quite happily, then boom! It gets knocked off course by a big tax bill, an increase in the mortgage interest rate, or an illness or divorce.

The first step is to acknowledge you have a debt problem and take control of the situation. Tell friends/family members so they can support you.

Get free, independent, specialist advice. Talk to one of the debt advice agencies, such as the National Debtline (0808 808 4000) or the Consumer Credit Counselling Service (0800 138 1111). They offer free advice on the full range of debt remedies (including bankruptcy, County Court administration orders, Individual Voluntary Arrangements). Don't ever pay for debt advice.

Understanding Your Debt Problem

Working out what's gone wrong is crucial in helping resolve debt problems. Research by Callcredit shows that more than 60 per cent of consumers simply don't know how much they owe. Start by making a list of your creditors (mortgage lender, landlord, utility companies, council, Inland Revenue, credit card companies, banks, friends, etc). Speak to them as soon as you can about your financial difficulties and clarify how much you owe. Most companies are sympathetic to people who act quickly and want to come to some agreement.

Michael Coogan, director general of the Council of Mortgage Lenders says: 'Many [lenders] go to exceptional lengths to provide debt counselling, reschedule payments, extend loan terms, or in some circumstances even allow payment breaks.'

Prioritise Your Debts

It's easy to be panicked into paying a debt if you've been sent a threatening letter or court summons. But it's essential to deal with priority debts first - the ones that could lead to you losing your home, being evicted or having your gas or electricity cut off. Non-priority debts include arrears on bank loans, overdrafts, credit cards, catalogues, charge cards and personal debts to friends and family

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Work Out A Budget

Work out how much spare cash you have when all the monthly expenditure has been deducted from the monthly income. Use our 4Homes Money Planner to help.

Take a long hard look at your spending to see if savings can be made. Once you have done this, you can see what money's left over to pay your debts. Don't over stretch yourself. Your creditors will prefer regular small payments to irregular larger payments that you can't sustain.

Debt Facts

1. Britain's personal debt is increasing by £1m every five minutes.
2. 4.8m adults spend more than they earn every month.
3. The average person in the UK now sees over half their monthly take home pay eaten up in debt repayment (35 per cent mortgage, 18 per cent other debts).
4. Citizens Advice deal with 6,600 debt problems a day.
(Source: Call Credit and uSwitch)

Make Debt Management Plans

Your creditors will expect you to draw up a financial statement or debt management plan showing your current financial position in detail. The debt agencies can help you with this. Or follow the guides in Don't get down about debt. Take action - a free leaflet from Credit Action and Which? Managing Your Debt guide by Phillip Inman (£10.99, 01903 828557).

What's On Your Credit File?

The credit reference agencies (Experian, Equifax and CallCredit) hold details of your credit history. Lenders use this information, with their own criteria, to decide whether to lend you money or credit cards. So it's important your credit file is correct. You can find out what information's held for a fixed fee of £2 (for a Statutory Credit Report). Ring 0870 4421211 for a free booklet 'No Credit?'. Steer clear of companies offering to 'repair' your creditworthiness. If there is anything wrong on your file, the credit reference agency is obliged to change it without charge.

Reign In Your Borrowing

*Don't be tempted to borrow more money to pay off existing debts - unless first seeking independent advice. The papers and daytime TV are full of adverts for 'consolidation loans' which allow you to lump several loans (credit cards, overdrafts, etc) into one, often with a top up to release extra cash. But these loan companies either charge fees which are added to the loan; sell secured loans that put your house at risk; or a loan that's so big it quickly becomes unaffordable.

*Avoid doorstep lenders too. Interest rates are generally high (some as much as 900 per cent APR). Look at other options if you really need to borrow such as joining a credit union where interest rates are capped by law. Find your nearest from the Association of British Credit Unions.

If you rely on your overdraft at the end of each month, find out how much it is costing you. Cut back as much as you can, and if you think you're being charged excessive overdraft fees or interest rates, switch account (compare accounts at uSwitch) *Don't withdraw cash on a credit card or use credit card cheques. These are not cost effective ways of borrowing money.

Maximise Your Income

*Consider doing overtime or extra part-time work to boost your earnings.
*Increase your income by letting out a room. Earnings up to £4,250 are tax free! Visit www.direct.gov.uk and type in 'Rent a Room scheme' for details.
*Check you are getting all allowances and benefits you might be eligible for, visit your local Jobcentre Plus or go to www.entitledto.com.
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The views represented in this article are those of the author and not of Channel 4. The purpose of the article is to provide general information only and does not constitute financial, investment, legal or other advice.You should not rely on any information provided in this article and you should always seek out independent professional advice relevant to your own particular circumstances.

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A step-by-step guide on how to switch mortgage lenders

Despite all the doom and gloom surrounding the mortgage market, record low interest rates mean homeowners can still save a tidy sum by making sure they are getting the best deal.

The question of whether or not to remortgage once your current deal came to an end used to be simple. Homeowners who stayed on their lenders’ standard variable rate (SVR) for any longer than it took to arrange a new deal were generally viewed as being apathetic at best, if not just plain bonkers.

But times have changed, and one of the peculiar quirks of the credit crunch is that in many cases, lenders’ SVRs are now more competitive than the new mortgage deals on offer.

The high deposits that lenders now demand have further muddied the waters. Two years ago, homeowners needed deposits of just 5% to 10% to qualify for the best deals: today that has soared to 40% (though lower deposit mortgages are starting to creep back into the market, with several competitive deals now available asking for 25% up front).

At the same time, however, falling house prices have eroded the equity stake that people have in their properties, making them less likely to qualify for one of the top deals. For example, if you have a £160,000 mortgage on a property bought last year for £200,000, at the time of buying you owned 20% of the home and the lender owned 80%. However, if the home is today worth £170,000, you now own just under 6% of the property – and are therefore likely to be disqualified from the pick of the mortgage deals.

How to get a good mortgage deal

Rest assured, there are still good rates out there, and, armed with the right facts, homeowners can easily navigate the remortgage maze to decide if they would be better off taking out a new loan. Someone with a £150,000 mortgage, for example, could save nearly £230 a month by switching from one of the least competitive SVRs to one of the current best-buy rates.

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climbing out of credit crunch

Credit trouble used to be a problem for only a small percentage of people. Today, it's a global affliction that's causing many banks to revise their offerings. The credit crunch is going to create some serious headaches for people in need of debt relief.
The credit crunch has brought our Treasury secretary to his knees, and shaken Wall Street to the core. Now, it appears that the credit trouble of the financial markets has started to transfer to consumers. Even with the £500 billion bailout package, it looks like there are challenging days forthcoming for people with credit problems. The latest announcement by a major credit card company indicates that there'll be tough times ahead for people wanting debt relief.

Tougher restrictions

American Express recently announced a new policy that allows the company to penalize customers based on the stores they frequent and their mortgage lenders. This policy may seem somewhat arbitrary, but it's symbolic of the risk aversion now being favored by credit card issuers.
The companies' reaction is becoming a familiar story on the financial scene, particularly with credit cards. Consumers have less access to funds tapping their home equity, so they're relying on their credit cards for debt relief.

Going backward

Credit trouble usually begins with an over-reliance on plastic. This type of debt can be debilitating, especially in a slumping economy. If you find yourself relying more and more on cards to make ends meet, it's time to take drastic action.

Why? Because the policy initiated by American Express could easily be replicated by its competitors. In one fell swoop, a credit card issuer could close your credit line and eliminate your access to cash.

Immediate action required

If you find yourself in a personal credit card crisis, take immediate action. Start by getting a handle on your monthly expenses in comparison with your monthly income. Develop a monthly budget. Find out where you can cut back on your credit cards, and then start shaving dollars.

This may be a simple solution for people who simply overspend on frivolous items; but if you find yourself relying on credit cards to pay the rent and buy groceries, even more drastic action will be required. Contact your credit card issuer and see if you can arrange an alternative payment plan for your debt. Ask if they can lower the interest rate, or if they'll accept lower monthly payments. You may even have to ask friends or family for a loan. Taking these dramatic steps today could limit the pain in the future if the situation worsens

Times are tough for people with credit trouble, and the recent action by American Express serves as a harbinger for what's ahead. Now more than ever, you must take action to reduce your debt load. The government is taking steps to help the credit situation improve, but if their bailout fails, you should be prepared for the worst-case scenario.

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