UK recession: The painful scars of five savage years

FEW households have been left untouched by the effects of the credit crunch that began five years ago this week

It was on 9 August, 2007 that fears of a dramatic unravelling of the sub-prime market began to be realised. Markets froze and the contagion began as banks worldwide realised they had no idea of their own exposure to bad debt, let alone other that of other banks.

The crisis became very real in the UK in September 2007 when images of Northern Rock customers clamouring to withdraw their money sparked panic on the high street.

For all the hopes since then that the worst was over, things have never been quite the same.

Now, in August 2012 the crunch, the banking sector trauma and, ultimately, the sovereign debt crisis in Europe continue to cast a cloud over household finances.

Sylvia Waycot, spokeswoman for Moneyfacts.co.uk, said: “The credit crunch may have officially started five years ago, but its pain is still as raw today as it ever was.”

Here we look at how the crisis has impacted on our borrowing, saving and investing.

SAVINGS

Cash savers have been hit hard. Interest rates began falling in December 2007, but the damage was done in a short spell 12 months later.

Between October 2008 and March 2009, a series of rate cuts sent the Bank of England base rate plunging from 5 to 0.5 per cent, where it remains today.

Inflation has gone in the opposite direction, with dire consequences for savers.

For much of the past three years, inflation has wiped out any gains there may have been from most savings accounts. The loss of income has hit pensioners in particular, with millions on fixed incomes forced to eat into their savings capital. The average savings product now pays just 1.09 per cent, down from 4.12 per cent five years ago.

While that is above the base rate, unlike the August 2007 average, it compares with the most recent inflation reading of 2.4 per cent, the lowest since 2009. In August 2007 inflation stood at 1.9 per cent, giving savers plenty of margin above rising prices.

“Savers continue to be hurt by the enormous drop in savings rates and they have little hope of beating inflation let alone supplementing incomes or growing nest eggs,” said Waycot “Increased talk of the Bank of England further reducing its base rate will only add to the air of despair.”

MORTGAGES

If any group can be considered to have gained from the crunch, it’s homeowners. Even that has to be qualified, however. The plunge in the base rate to 0.5 per cent sent variable mortgage costs plunging, with those on trackers benefiting from record low repayments and many taking advantage by overpaying in an attempt to clear their mortgage early.

Lenders have raised their standard variable rates (SVRs) where possible over the past three years, however, and are now embroiled in a rate war as they try to get more customers onto fixed rates.

While best buys are cheap, the cost of the average fixed rate mortgage isn’t as far below the rate in 2007 as you might expect, given the drop in the base rate. The average two-year fix is now 4.65 per cent, down from 6.54 per cent in August 2007, according to Moneyfacts.

And many borrowers have suffered from the crunch. First-time buyers without deposits of more than 10 per cent have found it increasingly difficult to get on the housing ladder. Similarly, homeowners without a decent chunk of equity have struggled to get affordable new loans once their fixed rate mortgages have expired.

LOANS AND CREDIT CARDS

The cost of the average credit card is higher than five years ago, despite the much lower base rate.

The same goes for personal loans and both products have followed the same pattern as mortgages. In other words, cheap deals are available but the best are offered only to borrowers with the cleanest credit records. In the credit card market, more lenders are offering cards with rewards, but the availability of these is also limited to a select group of customers.

Waycot said: “This is an extension of a lack of appetite for risk that kicked in at the start of the banking crisis when it became harder for anyone to get a credit card and personal loans became driven by credit rating rather than a generally offered rate.”

PENSION SAVERS

The consequences of the crunch and the ensuing financial crisis mean that people retiring now are getting far less income for their  pension savings.

Annuity rates have plunged over the past five years, reaching an all-time low this summer. The recent decline is due partly to quantitative easing, which has driven down the gilt yields used as basis for annuity pricing. Rates are expected to continue falling, spelling  misery for millions of workers approaching retirement.

The decline compounds the damage inflicted on pension savings by market volatility, leaving many people with smaller pension pots at retirement than they might have expected.

The crisis has also accelerated the decline in final salary pensions.

Desperate to rid themselves of growing pension liabilities, more companies have closed their final salary schemes and shifted workers into defined contribution arrangements, where the outcome is dependent  largely on contributions and investment performance.

INVESTORS

The impact on private investors of the crunch has been as much about the lasting effect on sentiment as it’s been about the initial hit taken by markets.

Paul Lothian, director of Verus Chartered Financial Planners in Dundee, said: “There is no question that the credit crunch (or more specifically, its alacritous negative impact on asset values) caused a similar crash in investor confidence, which most have yet to regain.”

Markets have proved relatively resilient of late and many experts believe investors who take advantage of current valuations will be handsomely rewarded. But the appetite for risk is diminished, with money piling into corporate bonds, absolute return funds and others that promise – without necessarily delivering – some protection from market turbulence.

“The nadir of March 2009 proved to be the buying opportunity of a lifetime but, unsurprisingly, few retail investors had the appetite.”

That hasn’t changed. Unfortunately, however, the flight to safety has presented high street banks in particular with the opportunity to lure cautious investors into expensive products with flimsy capital guarantees.

“This ignores the truth about investing; namely that risk and return are related, and that the best approach is to buy and hold an appropriate mix of asset classes, widely diversified, regularly rebalanced, held over the long term and at the lowest cost possible,” said  Lothian.