Archive for February, 2010

A second mortgage credit crunch that will send UK house prices into a new tailspin is looming, economists and credit experts have warned.

The squeeze on debt will begin to be felt in January next year, when lenders are due to start repaying £319bn borrowed from the Government during the original crisis in 2007 and 2008 – a quarter of the UK’s entire £1.3 trillion stock of mortgages.

To pay the money back, credit-rating agency Moody’s said, banks and building societies may “limit their lending through tighter credit criteria” – in other words reducing availability and making mortgages more expensive.

Capital Economics added: “The prospect of a fresh mortgage credit squeeze later this year or during 2011 hardly inspires confidence in the durability of the housing market recovery.”

Credit is already tight. In 2009, societies removed £7.4bn from the mortgage market and approvals dropped to 1.3m, compared with 3.4m annually from 2005 to 2007.

Lobby groups have called on the authorities to delay the timetable but, last week, Mervyn King, Bank of England Governor, confirmed that the main state-backed liquidity scheme, providing £185bn of funding, would end in January 2011 as scheduled. The full £319bn must be repaid by April 2014.

Echoing a warning from the Council of Mortgage Lenders (CML) that removing Government support will choke off lending and raise mortgage costs, Moody’s said yesterday: “If debt markets cannot take up some of the funding gap left by Government schemes, the impact on the UK mortgage market will be significant … The contraction will put pressure on house prices.”

The £319bn “funding gap” is the difference between the amount the banks hold in retail deposits and the sum they have lent. The gap used to be financed in the wholesale markets, which froze in August 2007. They have been replaced with emergency state schemes.

Illustrating the scale of the crisis, CML data shows that UK lenders raised £130bn in the markets in the 12 months before the crunch but just £11.5bn in the past two years.

Moody’s added that the benign environment of low interest rates and “other Government stimulus [which] have helped borrowers” may just have been “transitory”.

Rising bad debts would be particularly severe for building societies, which lost £7.6bn of deposits last year. Their credit ratings have also been slashed, effectively barring all but Nationwide, the largest society, from using the wholesale markets.

“Building societies have been the main victims,” Moody’s said. “Without access to cheaper Government-backed funding, many will find it increasingly difficult to survive.”

Societies are in discussions with the Financial Services Authority about creating a new debt instrument to shore up their balance sheets. Called mutual ordinary deferred shares (MODS), the debt will not mature and will pay an annual coupon that can be axed to preserve capital in extreme circumstances.

The FSA has not yet approved the instruments.

source: Telegraph.co.uk

Credit card rates are at their highest for 12 years, according to new figures, despite interest rates being at a record low.

The average APR on credit cards is now 18.8%, the highest since February 1998, according to research from the personal finance site Moneyfacts.co.uk.

Having fallen to a low of 14.8% in February 2006, rates have been climbing steadily. In February 2008, the average APR charged on cards was 16.8%, with the Bank of England’s base rate at 5.50%. The APR jumped to 17.7% a year later, while the current high comes at a time when the base rate is at just 0.50%.

The high credit card rates could cause difficulty for thousands in the UK, as a separate report highlights the reliance placed on plastic by British consumers – a survey by the price comparison website money­supermarket.com suggests one in five adults have three or more cards. Around 14 million people use credit cards to pay for day-to-day expenses, the survey of more than 2,000 Britons indicated.

“The UK continues to suffer from a high level of unemployment and providers are worried about the increased risk of ­customers not repaying their debts,” said Michelle Slade from Moneyfacts.

“The increased risk continues to be passed on to both new and existing credit card customers through higher rates.”

She said borrowers with £5,000 debt on their cards who repay the minimum each month will have to pay an additional £2,289 over the life of the debt, when compared to February 2006.

“Other charges such as balance transfer, cash withdrawal and foreign transfer fees also continue to go up, leaving customers paying more across the board,” Slade said.

source: Guardian.co.uk

ritons are struggling with an astronomical collective personal debt of £1.46trillion.

Advice agencies are under siege, with an increase of 30 per cent in the number of people seeking help in one year.

Some are being forced to wait up to six weeks for an appointment.

Others are being turned away, with two debt agencies refusing new clients because their waiting lists are too long, according to a report from spending watchdog the National Audit Office.

The debt mountain, which includes everything from mortgages to credit cards and personal loans, has soared to record levels and is now equal to about £56,000 for every household, 60 per cent higher than average pre-tax income.

The figures were issued as debt experts warned that a record 150,000 people could to be plunged into insolvency this year  – 15 per cent more than last year.

They said there is usually a time lag between the start of a recession and people losing the battle with their finances.

Mark Sands, head of bankruptcy at the accountants RSM Tenon, said it is not necessarily losing their job which tipped people over the edge, but losing overtime pay or a bonus.

He said: ‘If you’ve got £50,000 of debt on your credit card and you’ve lost one of your shifts then you are going to hit the end of the line.’ 

The Government is committed to pumping £143million into providing extra debt advice between April 2004 and March 2011, mainly in free faceto-face counselling.

Most of the money was given to Citizens Advice and some has also gone to other agencies, such as National Debtline. But Tory MP Edward Leigh, chairman of the Public Accounts Committee, called the Government’s approach ‘a triumph of bureaucracy over practicality.’

The cash distribution has been focussed on face-to-face meetings, the most expensive type of advice, which costs an average of £265 per person. By comparison, phone advice from National Debtline costs £51 and internet advice just £16.

The NAO praised the fact that the Government’s debt strategy is proving cheaper than anticipated and helping more people.

The target was to help 261,000 people at a cost of £330 each, but so far 270,000 have been advised at £311 each. But more needed to be done.

NAO head Amyas Morse said: ‘The Department for Business, Innovation and Skills project has done well. But demand is outstripping capacity and the department needs to look at ways of reaching even more people.’

Consumer Minister Kevin Brennan said: ‘It is crucial that when people are struggling with debt, they seek help as soon as possible. The Government will not hold back from helping those most in need.’ 

Aviva’s Real Retirement report also shows that more than one in five people aged 55 and over live on less than £750 a month.

wo-fifths of people approaching retirement are failing to save anything to help support themselves when they leave work, research showed today, with many of these “pre-retirees” having a substantial amount of debt.

The first Real Retirement report from the UK’s largest insurer, Aviva, which reviews the finances of three ages of retirement – pre-retirees (55-64), retiring (65-74), and long-term retired (over 75) – reveals that those in the 55-64 age group are generally much worse off than people who have already reached state pension age.

The report paints a picture of a divided Britain with a growing gap between the super rich and the very poor, with more than one in five people struggling to survive on less than £750 a month and an increasing number entering retirement saddled with debts.

On average, those aged 55-64 have saved £57,002, suggesting a relatively healthy level of savings and investments, but the report said the headline figures were “highly misleading”.

In fact, the median or typical amount of savings is far lower at £8,593, and the savings of a small number of rich people are disguising the relative poverty of a large minority. More than a quarter of 55-64-year-olds still have a mortgage with an average debt of £52,535, and one in five still owe more than £75,000 on their homes.

The report shows the average income for households across the three age groups is £1,284 a month – 31% less than the average UK monthly income of £1,623 – and it falls with age.

While rises in the state pension have outstripped inflation by 12% over the past decade, many pensioners are still struggling on low incomes. More than one in five of those surveyed – both retirees and pre-retirees – live on less than £750 a month.

However, the report reveals that a number of 55-64-year-olds actually benefited as they reached retirement age, with the state pension pushing their incomes over the £750 a month threshold.

For most over-55s non-mortgage debt is not a major issue, with the typical household having no outstanding credit cards, loans or overdrafts. The mean unsecured debt in this age group is £2,336, while those with the most debt are those who also have mortgages.

Jeopardising annuity incomes

Aviva’s Clive Bolton said: “Baby boomers are far more comfortable with debt than previous generations. Therefore we are seeing an increasing number of people entering retirement with unsecured and secured borrowing. Aviva research shows approximately 10% of the proceeds of equity release is used to repay debt.”

The quarterly report from Aviva also revealed that more than 8.5 million over-55s could be jeopardising their retirement incomes because of a worrying level of ignorance and confusion about annuities, the investment products that convert pension savings into a regular retirement income.

The average income a woman derives from her annuity is £99 a month compared with £151 for the average man. On average, women take out annuities at the age of 59, marginally earlier than men at 62, but both do so significantly sooner than they have to by law. If they held off purchasing an annuity for 10 years men could get 32% and women 24% more annual income.

Confusion about the market means that just 29% of married people under 65 and 41% of those over 65 take out a joint life annuity, a product for married couples which means that on the death of the holder a percentage of the payment continues to be made to the surviving spouse.

Aviva research shows “this is not done maliciously, but due to a serious lack of understanding – 54% of consumers over 55 do not know what a joint annuity is.”

This lack of knowledge could see some people finding that their income dries up when their partner dies.

“We believe some of the annuity confusion is a result of previous generations benefiting from an extensive state benefit support system. They simply didn’t need to know about these products,” Bolton said.

“However, this is not the case today, which is why it is so important that the current generation of over-55s take the time to understand these products in order to get the best possible in-retirement income.”

Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown, said politicians and insurance companies had let investors down.

“The state pension system is not fit for purpose. It is complex and bureaucratic; for some people it is a disincentive to save.

“We should be encouraging as many people as possible to save for retirement. The fact that 39% of 55-64-year-olds are not saving at all shows that the system isn’t working.”

source: Guardian.co.uk

The number of people who had their homes repossessed reached a 14-year high during 2009, figures have shown.

The Council of Mortgage Lenders (CML) said 46,000 homes were repossessed last year, the highest number since 1995.

That was an increase of 6,000 on the total for 2008, but was lower than the CML’s most recent forecast of 48,000.

Lenders took 10,200 properties into possession in the fourth quarter of 2009 – 13% lower than in the third quarter.

That was also a drop of 2% on the last three months of 2008.

In December 2008 the CML had predicted 75,000 homes would be repossessed in 2009.

‘Challenging year’

In terms of payment difficulties, 188,300 mortgages ended the year with arrears equivalent to at least 2.5% of the outstanding mortgage balance, the CML said.

This was lower than the total of 195,000 it had anticipated, and 3% lower than at the end of the third quarter of 2009. But it still marked a 3% rise on the end of 2008.

CML director general Michael Coogan said: “The fact that mortgage arrears and possessions did not rise as much as we feared in 2009 is testament to the effect of low interest rates and a great deal of concerted effort by lenders, government and the advice sector to help borrowers to address financial difficulties when they occur.”

As a result, the CML said that its current forecast for 2010 of 205,000 arrears cases and 53,000 properties taken into possession may be “a little pessimistic”.

However, Mr Coogan added: “We are not out of the woods yet – 2010 will still be a challenging year for many borrowers, and some households will inevitably find their finances being squeezed if and when interest rates do eventually rise.”

source: BBC.co.uk

The latest insolvency figures, showing record insolvencies in 2009, are just the tip of the personal debt iceberg, according to insolvency trade body R3.

R3s research released today indicates that an additional one million individuals (916,000) are struggling with debts without seeking help.

As the Governments latest 2009 statistics shows a 26 per cent increase in personal insolvencies from 2008, R3 President Peter Sargent says, Even these record personal insolvencies are just the tip of a very worrying personal debt iceberg. What lies below the waterline is a much larger group who are sadly not facing up to their debt problems.

R3s research indicates that around one million people are struggling without seeking help, and a further half a million (574,000) have contacted their creditors informally for help after struggling with their debts. All in all, the number of people experiencing financial difficulty is estimated to be around seven times the number of people in formal insolvency.

Commenting on the formal insolvency statistics out today, Peter Sargent said: We know from previous recessions that early recovery can be a dangerous time insolvencies continue to rise even after a recession ends. We are predicting 127,191 personal insolvencies in England and Wales for 2010.

Commenting on corporate insolvency, R3 President Peter Sargent said: The latest insolvency figures for the fourth quarter of 2009 are significantly below expectations for corporate insolvency for this point in this recession, measuring a 1.7 per cent decrease on the previous quarter. However, we should not take this is as a sign that the worst is over. The last few months of 2009 were relatively quiet for Insolvency Practitioners as the Governments Time to pay scheme kept some businesses away from insolvency and banks broadly continued to lend their support.

We know from previous recessions that, although the overall economic outlook is brighter, this is the most dangerous time for businesses as creditors attempt to collect money owed and policy makers cut measures aimed at helping those in financial trouble. The MPCs decision to hold interest rates at 0.5 per cent suggest they recognise the risk of a double-dip recession.

Our members have identified an insolvency lag which shows it can be years after recovery starts that insolvency figures level off. We expect 28,000 corporate insolvencies this year in the UK, although only a slight increase from 2009 is still a 22.8 per cent jump on the figures for 2008 (22,792). We are also predicting 154,000 personal insolvencies for 2010, a 22.2 per cent increase on 2008 (128,046).

R3 is the trade body for Insolvency Professionals, and is made up of 97% of the UKs Insolvency Practitioners from all over the UK. R3 comments on a wide variety of personal and corporate insolvency issues.

source www.r3.org.uk

The number of people who were declared insolvent in England and Wales hit a record high in the last quarter of 2009 and during the year in full.

The figures from the Insolvency Service marked the depth of the recession, with 35,574 people declared insolvent in the last three months of the year.

That was a rise of 25% on the same period a year earlier.

The number of businesses going bust also rose to a new annual record in 2009, with 6,355 going under.

Annual rise

Over 2009 as a whole, there were 134,142 people declared insolvent in England and Wales. This was up 26% compared with 2008, and higher than the previous record – in 2006 – of 107,288. Records began in 1960.

However, the number of personal insolvencies only crept up by 332 in the final three months of the year, compared with the previous three months.

The quarterly total was made up of 17,007 bankruptcies – down 5.5% on the same quarter of the previous year, 13,219 Individual Voluntary Arrangements (IVAs) – up 26.3% on the corresponding quarter of the previous year, and 5,348 Debt Relief Orders (DROs) – which were introduced in April.

These DROs allow people with debts of less than £15,000 and relatively few assets to write off these debts without a full-blown bankruptcy.

Record low interest rates would have staved off insolvencies for some people, but long-term unemployment would make it difficult for others to avoid the situation.

Creditors have also started to get tough, according to Louise Brittain of Deloitte. This was reflected in the jump in IVAs, when individuals come to an official deal with their creditors.

“This is a result of increased creditor pressure which is unlikely to let up any time soon, and highlights the desperate financial difficulties facing individuals,” she said.

She added that the rise at the end of 2009 was surprising given that many people tended to delay dealing with acute debt issues until after Christmas.

IVAs could also have risen as people cutting hours instead of being made redundant had some funds to pay back debts instead of going bankrupt.

Many experts have suggested that there will be more pain to come despite the UK coming out of recession.

“We expect to see the numbers continue to rise as the upwards trend in personal insolvencies traditionally continues for nearly three years after the worst of a recession has passed,” said Pat Boyden, from accountancy firm PricewaterhouseCoopers.

Business picture

In the last quarter of 2009, the number of companies going bust fell by 7% to 1,465, compared with the previous quarter.

The figures continued the downward trend in receiverships, administrations and company voluntary arrangements which has been seen during the past year.

Even so, 2009 as a whole still saw a record number of companies being declared insolvent with an annual total of 6,355, a 1% increase on 2008.

The number of companies being liquidated – the end stage of the insolvency process – fell in the last three months of 2009. There were 4,566 company liquidations, down by 2% on the previous quarter and 1% fewer than a year earlier.

For the whole of 2009, the number of firms being liquidated rose to a record 19,077, an increase of 23% compared with the previous year.

HM Revenue and Customs has held back on winding up businesses owing to unpaid tax bills, according to insolvency practitioner Alan Tomlinson.

“The Revenue are being quite benevolent at present with Britain’s struggling businesses but it is likely they will roll up their sleeves once the general election is behind us. Therefore we are likely to see another wave of company failures in the second half of the year,” he said.

Recession comparison

Compared with the last recession in the early 1990s, the latest figures show a very different picture.

The number of individual insolvencies has shot up in the past decade, and now far outstrip the numbers seen in 1992 and 1993 of about 37,000 each year, although it is easier now to be declared bankrupt.

Experts said this was because the amount of credit built up by individuals – especially on plastic – mushroomed in the last decade. Since 1993, the amount of personal debt in the UK – including mortgages – has risen from £398bn to £1.46 trillion.

IVAs were also in their infancy in 1992-3.

This means that 0.3% of the adult population was declared insolvent in 2009, a far higher rate than the 0.1% recorded in 1992 and 1993.

But the number of companies being wound up, via various forms of liquidation, still falls far short of those recorded in 1992.

Then, 24,000 companies were wound up, 2.6% of all companies in existence.

The current liquidation rate, which has increased in the past two years, is still less than 1%.

source: BBC.co.uk

Financial angst is the biggest cause of stress for 40% of adults, research shows, with more people aware of the fragility of their jobs as the economy struggles to recover.

Money worries are the main concern of stressed-out Britons, according to the result of a poll published today which reveals that as many as 40 million adults admit to suffering from some form of regular anxiety.

Financial angst is the single biggest cause of stress for 40% of us, followed by problems with friends and family members (25%), health concerns (24%) and stress at work (22%). The recession has caused further headaches with concerns about redundancy or unemployment fifth on the list, cited by 21% of adults surveyed

The research was carried out by market researchers. Its senior health analyst, Alexandra Richmond, said: “Even though the recession may be over, people have become more aware of the fragility of their jobs, or indeed the price of their home, which is why employment and finance top our list of worries.”

Britain’s women are revealed as the nation’s biggest worriers, with increased numbers of men (55%) more likely than women (45%) to say they are not troubled by anything. More than one in 10 (11%) women claims to have five or more worries compared to just one in 14 men.

When it comes to dealing with stress, the British stiff upper lip prevails. As many as 16 million of us talk to family and friends as a way of coping with stress, but only 6% of respondents felt able to turn to a professional for help, such as regular counselling.

And given their serious financial concerns, people are having to find cheaper ways of managing their stress than going on holiday. For “affordable escapism”, an estimated 20 million adults listen to music or read a book to unwind. And controversial complementary medicines – used by 2 million adults – are popular as an over-the-counter alternative to antidepressants.

Meanwhile, more than one in five of us (21%) admit to turning to drink when stressed, while more than one in 10 (13%) light up a cigarette. But men and women have different ways of coping, the research shows. Almost a quarter (24%) of men admit they turn to drink to drown their sorrows, compared with less than one in five (17%) women. By contrast, almost 20% of women turn to comfort foods, snacks and treats in times of trouble compared to just 9% of men.

Richmond said: “The fact that over half of us turns to our family and friends in times of trouble, compared to just 6% who go to a professional, highlights the extent of the stigma attached to seeking professional help to deal with stress.

“For many, seeking professional help may be regarded as a sign of defeat or inability to cope on their own. It is here that the British ‘stiff upper lip’ syndrome really affects people’s ability to get help when things overwhelm them.”

Last week, the strong link between economic downturn and depression was demonstrated when it was revealed the number of suicides in the UK has risen sharply since the recession began, reversing the downward trend of the past decade.

The figures from the Office for National Statistics showed a 6% increase from 5,377 deaths in 2007 to 5,706 in 2008 among those aged over 15.

source: guardian.co.uk

The number of people filing for insolvency is expected to dip slightly when figures are released tomorrow, before rising to historic highs in 2010.

Bosses are being forced to use their credit cards, raid their savings and borrow money from friends to keep their companies afloat, research revealed yesterday.

The findings call into question the pledge by banks to provide businesses with the funds to survive the recession.

The research also found businesses are being crippled by their customers’ failure to pay bills promptly.

One of the worst offenders is the Government, with one in three bills paid late, according to the Federation of Small Businesses’ study of 10,000 firms.

Prompt payment of bills was a key part of the Daily Mail’s Fair Deal for Small Firms campaign, which was launched in
2008.

FSB chairman John Wright said: ‘Late payment has been a particular problem in the past year and it is more important than ever that this worrying practice is brought to an end.’

The FSB’s research found that 41 per cent of bosses had ‘dipped into personal savings’ to find the money they needed and 21 per cent had used a personal credit card.

The FSB said its findings were ‘an indication of self-reliance as they encountered a banking sector which refused to lend’.

Another study published yesterday said 40 per cent of businesses which had tried to borrow during the second half of last year were turned away.

The Forum of Private Business said one in three had turned to ‘friends, relatives and company directors to secure funding for their business’.

The Department for Business said the late payment findings were ‘totally at odds’ with its data, collected each month from supplier invoices. All 22 central government departments have signed the Prompt Payment Code.

A spokesman said: ‘Around £21billion of payments were made by central government within ten days in December, with 19 out of 20 invoices now paid within ten days.’

Source Dailymail.co.uk