How to survive new financial climate

Published on Friday 2 January 2009 21:47

A TUMULTUOUS 12 months has left many of us in a state of financial flux. From investments and savings to loans and mortgages, markets have changed dramatically, making it essential to check your finances are on the right track. So as we enter the new year, what is the state of play?

SAVINGS

Savings rates were at rare highs until the recent interest rate cuts. Now, most providers have trimmed deals in line with base rate cuts. But a need to bolster balance sheets by attracting savings deposits means some banks and building societies are likely to continue to offer competitive deals, although savers will have to shop around for the best deals.

If you are prepared to lock your money away for a specific period, fixed-rate bonds are still available at about 5 per cent. Some cash Isas pay about 4.5 per cent and these may improve towards the end of the tax year.

One of the big lessons of 2008 was that some not all banks are iron clad – deposits over 50,000 with any given brand are not 100 per cent guaranteed.

INVESTMENTS

The experts thought the stock market would stagger before recovering to end the year on 6,000 or over. Their predictions were shattered early on, as the FTSE slumped from 6,400 to about 5,600 in the worst January since 1936. It ended the year just over 4,400, albeit better than the five-year low of 3,852 at the end of October.

One outcome, according to the Organisation for Economic Co-operation and Development, was that the average private pension declined by more than 15 per cent over the year. Things are not likely to improve in the coming year and the watchword for investors is diversification – ensuring investments are spread across different assets to reduce exposure to risk.

There may be opportunities, however, according John Moore of Central Investment Services. "Current valuations are cheap on any historic valuation basis and this could represent a great opportunity for investors with a longer-term outlook," Moore said.

See our expert forecasts on pages 46 and 47 for more on the 2009 investment outlook.

MORTGAGES

Lenders moved the goalposts in 2008 – or at least narrowed them significantly. Borrowers without a deposit or equity of at least 10 per cent have few competitive deals to choose from as lenders de-risk their loan books.

But after a spell of high fixed rates, the interest rate cuts of the latest quarter have given borrowers an opportunity to tie into low deals, while those already on trackers are paying hundreds less for their loans.

Few expect much to change in the early part of the new year. "The focus will be on high deposits and equity and there'll be little respite for the housing market, where house values will continue to fall," said Louise Cuming, head of mortgages at Moneysupermarket.com.

"For existing borrowers, the focus will be on the increasing number of people who fall behind on payments and there'll be a real spotlight on lenders ensuring they have the right support processes in place to manage customers through difficulties."

ENERGY BILLS

These are set to fall in the coming months, much-needed relief after record price hikes of 47 and 28 per cent for gas and electricity respectively in 2008. Early indications suggest prices could be slashed by as much as 20 per cent around March.

Scott Byrom, utilities manager at Moneysupermarket.com, predicted that 2009 would also see further changes to the way energy prices were structured. "We can expect to see more consistent prices across different types of energy meter and payment methods as Ofgem makes loud noises about treating customers fairly. It will be interesting to see if the government goes as far as forcing providers to reduce rates in an era of falling wholesale gas prices."

ANNUITIES

Annuity rates reached a six-year high in mid-2008, but they have already begun falling back, with most main providers trimming rates in recent weeks. More substantial falls are ahead as the bond yields on which annuity levels are based come down when interest rates decline.

A drop of 10 per cent would leave a 65-year-old man with a 100,000 pension pot 15,000 worse off in retirement, according to Hargreaves Lansdown. If you are looking to buy an annuity, therefore, it could be time to act before rates slide.

If you smoke or suffer from ill-health, you may be able to buy an enhanced annuity, which pays out more on the assumption the payout period will be shorter.

PERSONAL LOANS

The cost of personal loans has soared in recent months, while the number of loans available has halved, according to Moneyexpert. A year ago there were 105 loans available to those looking to borrow 5,000. Now there are just over 50, and the average APR on that 5,000 loan has trebled to 29.40 per cent.

As competitive deals have shrunk dramatically, high interest loans aimed at higher risk borrowers have become more prominent.

This is because, as in the mortgage market, lenders are putting a greater price on risk – if they think there's a chance they won't get their money back, they will either offer nothing or charge a higher premium than previously.

And, as in the mortgage market, the likelihood is that this pattern will only become more established over the coming months as rising redundancy levels mean more people struggle to make loan repayments. The same is likely to apply to credit cards.