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Your Money > Family Finances Articles > Five reasons we'll remember 2008
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By Richard Evans
The past year has been a momentous one for the world economy. And as giant companies such as banks, car makers and hedge funds have gone bust or teetered on the brink, the repercussions have been felt in every household in Britain. Here we recall some of the most significant events of 2008 and look at the lessons for our own finances. Banks Britain's banking industry was turned on its head in 2008. First, Northern Rock, the former building society that had run into trouble the previous year, was nationalised on February 22 after the Government's attempts to find a buyer failed. Ministers appointed an independent expert to determine what value, if any, the shares had - so, in theory at least, shareholders could still receive something for their holdings. But most observers say the chances of any compensation are slight. You can keep up to date with the valuer's work at www.northernrockvaluer.org.uk. Meanwhile, borrowers with a mortgage from the state-owned bank may not be offered a competitive new loan from the Rock when their current deal expires and could be better off switching to a new lender. Savers should also look elsewhere for the best rates. Bradford & Bingley, the buy-to-let mortgage lender, also needed rescuing. Savers found their accounts transferred to Abbey, the Spanish-owned bank, in late September, while the mortgage side was nationalised, so borrowers now owe their outstanding home loans to the Government. Early October saw two more dramatic developments: the failure of the Icelandic banks and the Government's bail-out of some of Britain's biggest lenders. Savers with Icesave and Kaupthing endured an anxious few days before the Treasury announced that it would ensure all customers received their money back in full - even above the compensation scheme's limit of £50,000. And the Government's "balti bail-out" - named after the takeaway that sustained officials as they hammered out the details - saw tens of billions of pounds injected into banks including Royal Bank of Scotland and HBOS in return for large stakes in the businesses. Public bodies including local councils had money deposited with the Icelandic banks and there are fears that council tax in some areas could rise as a result. The banking crisis saw a "lenders' strike" as banks clung on to their cash. Loans of all kinds became harder to find, interest rates did not fall in line with the Bank of England's base rate, lending criteria became far stricter and banks competed to keep their loans out of the best-buy tables Lessons: One result of the banking crunch is that your credit history is now far more important. Lenders will use the most minor infringements - reportedly including single instances of going overdrawn by just £30 - to justify turning down a loan request. Those wanting to borrow are well advised to check their record well before applying and set about correcting any mistakes. Stock market investors have received powerful reminders that no company or sector is totally safe, that unexpected risks can arise suddenly and that share prices can fall dramatically. House prices Last year saw the property crash get into full swing. House prices fell by 16.2 per cent over the year, according to the Halifax house price index, taking them back to the levels of August 2004. The average property is now worth £159,800, down from a peak of almost £200,000 in the summer of 2007. This, along with lenders' increasing reluctance to lend generally, led to the disappearance of 100 per cent mortgages - and even 95 per cent mortgages. The drying up of mortgage availability led to a slump in the number of house sales. Lessons: If you need to remortgage, the amount of equity you have in your home (the difference between what your house is worth and the amount you owe on your mortgage) can make a huge difference to the interest rate you will be offered. If you have less than 10 per cent equity you will struggle to find anyone willing to lend you the money, while the offers will improve if you have 25 per cent and again at 40 per cent. To keep your equity up as house prices fall, make sure you have a repayment mortgage rather than interest-only and make overpayments if you can. If a valuer calls to assess your home when you are remortgaging, treat him or her as you would a prospective buyer if you were selling. By showing your property in its best light and getting the highest valuation possible, you could increase your notional equity and qualify for a cheaper loan. Interest rates The City had the shock of its life on November 6 when the Bank of England cut its base rate by one and a half percentage points, from 4.5 per cent to 3 per cent. The Bank had earlier been criticised for cutting rates too slowly but no one expected it to act so dramatically in an attempt to catch up. Another cut of one percentage point followed in December, taking the official interest rate to just 2 per cent. It has never been lower in the Bank's long history, but many expect another cut this week. Lenders came under strong pressure to pass on the rate cuts to their own borrowers, although only customers whose home loans were tied to their lender's "standard variable rate" (SVR) were affected by this issue. Large numbers of mortgage holders have fixed-rate loans or trackers, where the lender is contractually obliged to cut interest rates in line with the Bank of England's rate. But some tracker borrowers found their loan agreements had a sting in the tail: "collars" or "floors" - a minimum interest rate that they would have to pay, no matter how low the base rate fell. Halifax, the biggest mortgage lender, decided not to impose its "collar" after coming under pressure from the regulator, although Nationwide announced last week that the rate paid by its existing tracker customers would fall no further. The rates on trackers for new borrowers increased dramatically - each time the Bank cut rates, lenders withdrew their existing products and relaunched them at higher margins above the base rate. Meanwhile, savers face earning next to nothing on their money as interest rates approach zero. Lessons: To say "this shows you should always get a tracker mortgage" is being wise after the event. Fixed-rate deals come into their own when rates are rising, saving borrowers from finding that their loan becomes unaffordable as repayments increase. Many value the peace of mind of knowing that their repayments will be the same every month. Savers can still get 5 per cent on their money if they tie it up for a year, so shopping around can pay huge dividends. Energy costs and inflation July 2008 set two records for energy costs: petrol prices peaked at about £1.20 a litre in the middle of the month, according to the AA, and British Gas raised its gas prices by 35 per cent on July 30. Britain's main energy companies increased their charges twice during the year, with rises of between 10 and 20 per cent in the early months being followed by more sharp increases in the summer. Many food prices also soared. As a result, inflation hit a 16-year high of 5.2 per cent in September, before starting to fall sharply to 4.1 per cent in November as the economy slowed rapidly. Many expect inflation to fall so much that deflation - falling prices - becomes the problem. The AA said recently that average petrol prices fell to their lowest for more than 21 months in December. It added: "2008 was a roller coaster for motorists at the filling station - we saw petrol and diesel prices rise to record levels and increase at the fastest rate the AA had ever seen, although the year ended with prices dropping back to a 21-month low." When fuel prices peaked in July, a family with two petrol cars was spending £49 extra a month on fuel compared with 12 months before, the organisation calculated. Lessons: As well as shopping around for the cheapest petrol or diesel, constantly check your energy tariffs, just as you monitor your mortgage and switch to a better loan if necessary. In fact, the market for the gas and electricity we use in our homes has become more and more like the mortgage market: there are dozens of different deals, which each suit different needs. Just as borrowers who couldn't afford an increase in their mortgage repayments are often advised to go for a fixed-rate home loan, people who would struggle with higher energy bills can also fix the price they pay. On the other hand, if you just want to be paying the lowest possible rate while accepting that prices can go up as well as down, "online" energy tariffs are usually the cheapest - but new ones appear all the time, meaning that consumers who are prepared to switch frequently will get the best deals. Switching supplier is a pretty painless process: you spend a few minutes on a price comparison website finding the best deal and switching to it, then you send in a meter reading on the day of the switch. There is no interruption to your energy supplies. The pound Sterling had a terrible year as falling interest rates and fears that Britain was particularly exposed to the economic downturn took their toll. The pound is now worth fractionally more than a euro at €1.05, but it began 2008 buying €1.36. Against the dollar, it has fallen from $1.99 on January 1 last year to just $1.45 now. Holidaymakers will find everything more expensive abroad in sterling terms, while retailers of imported goods may be forced to raise their prices. British pensioners who live abroad are particularly hard hit, as their fixed monthly income in sterling buys much less of the local currency. Those who own property in Europe could be caught if they are paying a euro-denominated mortgage from their income in pounds, but anyone selling up will benefit from the strong euro when they convert the proceeds into British currency. Likewise, any rental income in euros is worth more in sterling. Lessons: The days of flying off to New York to pick up some bargains are probably numbered, while those looking for cheap holidays might want to consider staying within Britain or jetting off to countries whose currencies have not appreciated strongly against the pound, such as Iceland or Turkey. Useful links: |
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