Credit crunch, where's the surprise?

So just a year into the "Credit Crunch" and all is doom and gloom. Repossessions continue to increase and are set to keep on increasing, inflation keeps on climbing (even though the price of oil has dropped some $30 in the last weeks). For those of you not young enough to have lived through the last recession then this may all be new to you, for people who have been around for a while there's nothing new here.

For a variety of reasons at the global level central banks have kept interest rates extremely low for years, this was done to stimulate growth while inflation remained hemmed in. The oil price was stable and prices for clothing remained low as we had all the cheap imports from abroad. This, along with some pretty poor advice from financial organisations, led to people believing that the good times would last forever. People became blinkered and forgetful, instead of doing a small amount of research:


17% in November 1979.

14.875% in October 1989.

Lowest rate throughout the 1980s was 7.735%



Source: http://www.thisismoney.co.uk/economy)

The all time average for the UK is 5-7%, so all those people who are moaning about the rises and the current rate being at 5% have taken a fool hardy short-sighted approach. In this day and age where advisers are able to show you repayment calculations, when you can run repayment models in standard software packages on your on PC (look up PMT in your spreadsheet package, and this is available in FREE, legitimate software).


Where does the blame lay?

The blame for this situation does not lay with any single person or institution, the banks have leant money to people that were a high risk, people have borrowed money at the limit that they could afford when rates were as low as 2.75%. That was never a realistic long term interest rate. People have once more turned to interest only mortgages but with the stock markets wobbling, the house prices falling we look set to re-visit another scene, where the endowment will not cover the full mortgage value at the end of the term.

Blame also has to be placed firmly at the door of those individuals who over stretched themselves in some foolish attempt to "keep up with the Joneses". They have set themselves up for a fall and it's a long way down from the pinnacle they've put themselves on.



Who are the winners and losers?

There's only ever one winner in this arena, the banks. They may be losing billions now but they've taken money, they've taken equity and they will come out ahead.

Those people who were given poor advise and have lost their homes are the losers in this, some now will be back in the world of negative equity that we last saw in the 1990s.



Don't trust your bank or building society, within reason they WANT to give you a mortgage, they will make a lot of money from you, typically you are looking at paying £2 for every £1 you borrow.

As you may well have noted from the tone of this if you want sympathy look elsewhere, I've done my homework, I've made sure I'm covered to some pretty horrific rates. I've built up a large cushion on my mortgage, I've got my "rainy day" funds, but then I borrowed within my limits and you'll find that my mortgage represents my only debt. If things should spiral out of my control then that's something I'll have to accept, but I've made every effort to cover myself for every eventuality.