As well as damaging the balance sheets of mortgage lenders, the credit crunch has significant impacts on the mortgage consumer. However, there are ways to survive the credit crunch, and small adjustments can be made that will mitigate the damage.
As banks and building societies tighten their lending criteria, mortgages become increasingly harder to access.
Furthermore, all types of unsecured personal borrowing such as credit cards and personal loans become harder to get. This guide details some basic ways to survive the credit crunch.
Mortgage borrowers:
To understand how to survive the credit crunch, it’s first necessary to understand how it affects you as an individual consumer.
For people with no or low debt and savings, the credit crunch shouldn’t be causing too many problems, aside from those consumers with savings locked into troubled financial institutions.
However, for borrowers looking for credit, the market is now a very different place. Consumers looking for mortgages, remortgages, credit cards and personal loans will all be affected by the credit crunch.
Repair your credit rating:
Check your credit rating for free or for a small fee, with Equifax, Experian or CallCredit. If you have a poor credit rating, there are ways to improve it. For instance, you can remove old defaults.
Using a single credit card and a mobile phone contract, and not missing any payments, will prove to banks that you are a reliable borrower.
Make all payments with direct debit to make sure you do not miss one. If you apply for credit across multiple sources, lenders will notice and this can damage your credit rating.
Deal with current debt:
Dealing with outstanding debt responsibly means making repayments reliably. If you cannot make repayments, you should contact your creditor and discuss the situation with them. Check the Mortgages.co.uk mortgage debt help and advice section for more information about dealing with debt.
Find the right mortgage deal:
Finding the right mortgage deal for your circumstances is very important, particularly when finances are stretched by the credit crunch. Depending on Bank of England base interest rate cuts or increases, the cost of mortgages may go up or down. Getting a good mortgage deal requires shopping around.
Those borrowers that took out a mortgage deal several years ago could face repayment shock. Borrowers that are hard-hit by repayment shock may consider switching to an interest-only mortgage, if their lender will permit this, although this should only be considered if there is a firm plan to pay off the capital. Experts say that borrowers should consider interest only as a last resort.
First-time buyers should not wait:
The Council of Mortgage Lenders claim that there is considerable pent-up demand amongst first-time buyers. Many are reportedly being forced to wait to get a mortgage, whilst others are holding on in the expectation of further falls in house prices. Some experts advise first-time buyers with a large enough deposit to commit now, and haggle to get the best price.
Use a deposit to your advantage:
Although 100% mortgages are virtually a thing of the past, and even 95 per cent and 90 per cent mortgages are more rare than they have been in the past, borrowers with a good credit record and the ability to repay a mortgage can still find loans. A 10 per cent deposit is likely to be the minimum considered, although this is subject to change considerably if interest rates come down and liquidity returns to the mortgage market.
Learn more about your situation:
Speaking to an expert or using online tools to learn more about your mortgage situation could help you to avoid problems relating to the credit crunch.
Make a realistic budget:
Make a realistic budget of your monthly outgoings, and work out what you can afford to cut out of your spending. Working out your monthly outgoings, including tax, debts, and spending helps consumers to understand where they can save. If you are able to include savings and investment as part of your budget, that’s all the better.
Learn about the implications of mortgage problems:
With negative equity more common as house prices fall, many borrowers are encountering difficulty with their mortgages. Learning about arrears and repossession could help consumers know how to avoid getting into these kind of problems.
Seek professional help:
If all else fails and you cannot meet your mortgage repayments, there is help at hand. Contacting your mortgage lender can give them the opportunity to come up with an alternative repayment plan.