surviving the recession

The Guardian newspaper has a story today about a survey that shows one in three firms operating a pay freeze. The businesses justify this as an attempt to preserve jobs even when the firm itself is in a profitable part of the economy. Some unfortunate people are on their second year of frozen pay.

What should you do if you have had to accept a pay freeze? The only thing to be done is to try to cut outgoings, especially debt. The interest on the debt becomes ever more burdensome in deflationary situations were wages don’t rise. It means that natural income progression can’t minimise the problem with time. The only way to give yourself a payrise in these circumstances is to cut your debts. Initially it will seem tough, but as the debt falls away, you should be able to negotiate lower interest rates on the remainder, and hence cut your outgoings.

The trouble is that while people were enthusiastically paying down debt in the first half of the year, they now seem to be tired of making the effort and are back to hoping that “something will turn up”. However I believe that the deflationary wage freeze world is here for some time (perhaps two more years). So the only way to get a bit of relief into the situation is tackle the debt now. I know I sound a bit like a broken record harping on the same topic endlessly, but there it is.

In my last post, I mentioned that Japan, Germany and France were out of recession. Now it looks like the UK might be out too, judging from the lift in business confidence.

It sounds strange, but households need to prepare for the end of the recession. While the recession has been harsh to those who have lost their jobs, the low interest rates have been great for those still in work. However, with the end of the recession, interest rates will rise again. Mortgages and other debt will again be harder to service. If you have any debt at all, now is the time to take action, to settle credit card debts, overpay your mortgage, sort out your finances.

Just to illustrate the possible shock people will get when interest rates rise - the Bank of England base rate is now 0.5%, with most variable mortgage rates at 2%. If base rates go up to 4% (the norm), then your mortgage interest rate will go to 5.5% if you are on a variable mortgage. That means that if you have a mortgage of £100,000, your interest payments jump from £166.67 per month to £458.33 per month. Can you find the extra £291.66 per month? If not, now is the time to pay that mortgage down, so you won’t be paying so much interest. If the arrangement fees on fixed rate mortgages were more reasonable, getting a fixed rate mortgage would also be a solution. But as it stands, the fees are so high, you end up paying the same as on a variable rate. The only solution is to overpay the mortgage to bring the down debt outstanding.

There are more and more stories online about people being harassed by debt collectors, despite the fact that laws are in place to protect vulnerable individuals from being frightened to death.

What should you do if you are in this situation? The best way to protect yourself from debt collectors, is to get in touch with one of the debt charities such as Consumer Credit Counselling. They should be able to inform you of your rights, and in some cases, will negotiate and deal with the debt collectors on your behalf, so that the personal harassment stops.

Many people don’t get help because they are ashamed, but the debt charities are completely confidential and they are free, so avail yourself of their help. 

So called “green shoots” seem to be sprouting all over the economy. Confidence is a little better than it was and certain indicators are ticking up, eg services output - not back to growth levels to be sure, but better than before.

All of this means that we have started the long climb back to normality, and that means inevitably that interest rates will have to start rising again.

By my reckoning, interest rates will start rising at the start of next year (though if the economy responds faster to the mdicine than expected, we should see rate rises at the end of this year). That means we have at most six months to make the most of the current low rate regime.

My advice is to use current conditions to pay down your mortgage as far as possible and to keep a sharp eye out for remortgage deals. Remortgage deals have been poor in the last six months, but the best deals are reserved for those with a spotless credit record and who have a low loan to value borrowing requirement. Therefore do ensure you meet all your credit obligations on time, pay all your bills on time and pay down your existing mortgage if you can to get the loan-to-value down.

Once you have spotted a decent deal (fixed rate of circa 2.5%), and qualify on all criteria, go for it.

Earlier in the week we had the surprise news that the Consumer Price Index had risen to 3.2% in February (everyone had been expecting a fall due to the recession curbing demand). The Governor of the Bank of England had to write a letter of explanation to the Chancellor of the Exchequer (the BoE is meant to ensure that CPI is no more than 1% above 2%).

What does this mean? It means demand is more resilient than thought, and if CPI continues to be high, interest rates will rise to curb it.

The thought of interest rates rising will cause a shudder to ripple through anyone who has any debt. People have been relieved by the fall in interest rates bringing down mortgage payments for those on the tracker or standard variable rate. But a rise would bring pain once more.

What to do? Lose no time in reducing your credit card debt. It carries the highest interest and does your wallet the most damage. Then move on to overpaying your mortgage if the terms of your mortgage allow you to. The less debt you carry the better you will be able to cope if interest rates rise.

We live in difficult times - the dreaded word “stagflation” lurks on people’s lips. Stagflation is where inflation is high, but the economy is in recession. The last time we had this was the 1970’s, and the cure was to tackle inflation by putting rates up to eye-watering heights, which sorted the problem out (but at enormous  cost). Once inflation was sorted the economy started to grow again. But it was painful. Protect yourself now by paying down your debt.