The Credit Crunch One Year On

For the last year there's been no getting away from the credit crunch. But what has it meant for you?

If I had a pound for every time I'd heard the phrase 'credit crunch' I'd never need to work again. I can't think of a day that's gone by in the last year without at least one mention of those infamous words. 

Cast your minds back to August 9 2007, which saw both the European Central Bank and the Federal Reserve in the US open up emergency cash to prop up their banking systems. On 12 September, the crisis at Northern Rock seriously -- and I mean seriously -- shook confidence in the UK as the lender went cap in hand to the Bank of England.

Even before August 2007, there were rumblings of trouble ahead. A growing number of banks issued profit warnings throughout the year, as the impact of exposure to the crisis-ridden US sub-prime mortgage market became clear. 

Before the credit crunch came along and wreaked financial havoc, the UK economy was looking pretty strong. Inflation and unemployment were low, while growth was high. But since then everything has changed as the economy began to falter.

Inflation has since smashed through the government's 2% target. The CPI -- the Consumer Prices Index -- is currently 4.4%, while the RPI -- the Retail Prices Index -- has reached 5%. What's more, for many of us those figures seem too low and don't reflect reality. On top of that, unemployment is rising, house prices are falling and some economists say we teeter on the brink of recession.

But what does all this mean for you?

Borrowers

The credit crunch has taken its toll on every corner of personal finance, but arguably, the worse affected are those of us who need to borrow.

As banks found it increasingly difficult to fund new loans through the money markets, individual borrowers saw the stream of easy credit disappear.

Indeed, interest rates and fees for mortgages have risen throughout the last twelve months, while lenders are demanding ever greater deposits. 

Northern Rock once provided 125% mortgages as standard, but the market for higher-risk home loans has since dried up entirely. According to Fool partner, Moneyfacts, there are now just two lenders left who still offer 100% mortgages. 

These days, to qualify for the most competitive deals, borrowers are now expected to stump up a huge 25% deposit. For many first-time buyers the prospect of owning their own home has become nothing more than a castle in the air.

But there is some positive news on the horizon. Moneyfacts say a number of mortgage rates have now returned to where they were in August 2007. In fact, the average two-year fixed rate deal is now 6.59% compared with 6.56% a year ago. But again, the best rates are reserved for those with the largest deposits or equity stakes in their homes and mortgage fees remain high.

When lending criteria is as strict as it is today, it makes sense for prospective first-time buyers and remortgagers to speak to an independent mortgage broker before choosing a new mortgage deal. You could try The Motley Fool Mortgage Service where we can recommend the best loan for you, whether it's available through brokers only or direct from the lender. 

Unsecured borrowing has become more costly too. At the beginning of 2007, personal loans with interest rates under 6% APR were relatively easy to come by. But today the market-leader, Moneyback Bank, is now charging 7.6% (for £5,000 borrowed over 60 months), with many other lenders gradually increasing APRs throughout the year.

It's a similar picture for the credit card market. All but the most creditworthy borrowers have found the best 0% balance transfer credit card deals -- such as Capital One -- are beyond their reach. 

You may have better luck going for a credit card that is still a best buy but doesn't necessarily top the tables. The Virgin Money Credit Card is a good choice for those of you with a reasonably decent credit rating but, at the same time, you don't have to be the perfect borrower.

Savers

Lending criteria has been pretty tough for borrowers, but there has been better news for savers. Many banks have found wholesale funding a challenge, so they have turned to depositors for cash instead. This has meant -- despite the credit crunch -- savings rates have held up pretty well over the last year.

In fact, there are a host of easy access accounts which pay well over 6% AER. If you're looking for somewhere to stash your cash, the current best buy accounts include Kaupthing Edge Savings at 6.55%, Birmingham Midshires e-Saver at 6.52% and Bradford & Bingley Internet Saver at 6.51%.

If you're looking to lock your money away over the longer-term try the Hi Save Fixed Rate bond from ICICI and earn 7.20%, with no strings.

Pensioners

If you're looking to convert your pension fund into an income using an annuity, now could be a good time to take the plunge. One of the few winners out of the credit crunch has been level annuities. (Level annuities provide the same amount of pension income every year for the rest of your life.)

Although annuity rates have been historically low in recent years -- roughly half what they were in the early 90s -- the credit crunch has brought a remarkable change of fortune. Why? Because the crunch has driven down the value of corporate bonds (or company debt) which -- in turn -- has forced bond yields up. Since annuity companies invest heavily in corporate bonds, annuities have been boosted after more than a decade of falling rates.  

There's no doubt the credit crunch has had severe repercussions, and it's almost impossible to predict how long the financial turmoil will last. In the meantime, we'll try to help beat it.

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