This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
The weekend newspaper money sections are terrified. A sample of their cover stories this week: “How to survive the housing slump”; “How to keep a roof over your head”; ‘How to survive a recession.”
It’s quite an about turn given that only a year ago these sections were mostly running cover stories explaining to punters how they could get on the property ladder if they borrowed 6 times their income and 125% the value of a starter home or running through the best way to bump up your credit card borrowing.
But better late then never: the media is absolutely right to be terrified and absolutely right to telling their readers so. The truth is that things are getting nasty out there. Only last week the Financial Services Authority said that more than a million people who have taken out mortgages in the last three years are at risk of not being able to make their monthly payments. They’ve borrowed too much on high multiples of their incomes or on overly high loan-to-value ratios (they’ve borrowed more than the property is worth), they’ve borrowed money for much longer terms than is usual and now they are beginning to wish they had not.
Will a rate cut help?
Many of these people will be praying for a rate cut to help them out on Thursday. But while they may get a rate cut it may not help them out much. The banks are no longer in the business of lending money to pretty much anyone who can breathe and at any rate they fancy. They can hardly manage to raise the money to keep themselves going so when they do get their hands on any cash they’ve got to use it well.
That means that they’re now in the business of cutting back on risk and of making money: they are going to lend less money to fewer people and even those who can persuade them to hand over some cash are going to find they really make them pay for it.
The mortgage lenders are now charging fees of a minimum of £400 and in many cases £1500 to all new borrowers, and even as rates come down many of them are bumping up their standard variable and tracker mortgage rates. Look at the comparison tables (see: Compare tracker mortgages) and you’ll see that borrowing money to buy a house doesn’t come as cheap as it used to.
And of course it isn’t just mortgage lending the banks are going off in a hurry. It is credit card lending too. One of the big stories of the weekend was the news that Egg has cancelled the credit cards of nearly 160,000 people. Why? First to cut their risks – they say the cuts are targeted mainly at those who have iffy credit ratings and are therefore a risk to their business. And second, to cut their costs (they say it isn’t so by the way but I don’t believe them).
Why Egg are dumping well-behaved customers
Scores of people have already written to the papers and covered the nation’s blog sites with complaints about how they can’t possible be a bad credit risk because they never use their cards. But it is exactly this that means they are being forced to forfeit their cards. If they don’t use them they aren’t paying interest on any debt and they are therefore of no use whatsoever to a company that makes money out of persuading people to pay absurd rates of interest on debt. So getting rid of them makes good business sense.
It all represents another fascinating about turn: lets not forget that only a few years ago Egg caused an entirely different kind of upset by sending out an email telling card holders to say “to hell with it”, have a night out on their credit card and worry about how to pay for it later. We don’t know yet if other lenders are going to follow Egg down this dump the dross route but I bet that if they think it looks like Egg will get away with it (and why wouldn’t it?) they’ll do so as fast as they can get the letters typed.
What can you do about all this? Unless you fancy buying stuff you don’t want and paying 16% plus in interest on the money you used to do so (as the credit card companies like you to) I suspect the answer is not much. I keep a few credit cards in my wallet as insurance against the fact that my debit card (a Maestro) often doesn’t work abroad and as more general insurance against suddenly needing more money than I have in my bank account in an emergency. But I think I’d rather give them up than be forced to use them. If you’d rather use them click here for a comparison table showing some that charge the least outrageous rates of interest: low interest credit cards.
Icelandic banks: beware the brilliant rates
So where is the good news for this week? I’m struggling to find it I’m afraid. There’s some talk about how savers at least are getting some gain from the credit crunch courtesy of the brilliant interest rates on offer to them from the Icelandic banks. Kaupthing Edge, the retail financial services branch of Iceland’s largest bank Kaupthing, has just launched an instant access account offering interest at 6.31% a year, and, as the papers keep pointing out, if you are prepared to lock up your money with them for 6 months you can get a whopping 6.8% on your money. Similar rates come from the likes of Icesave.
But as I said last week, we wouldn’t exactly be rushing to put our money into these accounts. You can read the full story on this here, but the essence of it is that the credit markets are pricing many of the Icelandic banks, as James Ferguson puts it “for bankruptcy,” something which has got to be a tiny bit off putting. Me, I’m sticking with HSBC.