subject: How to cope with the crunch: a guide for young and old
posted: Sat, 18 Oct 2008 20:09:48 +0100


http://www.guardian.co.uk/money/2008/oct/05/firsttimebuyers.mortgages


How to cope with the crunch: a guide for young and old

The crisis is affecting people at every stage of life, but often in
very different ways. In the first of our two-part 'survival special',
Lisa Bachelor and Huma Qureshi look at the problems facing young
adults and their families

Lisa Bachelor and Huma Qureshi
The Observer, Sunday October 5 2008

House prices are tumbling; it's easier to get blood from a stone than
borrow a mortgage at a decent rate; stock markets around the world
are on a rollercoaster ride; and inflation is still expected to rise
for another month or two yet.

The current economic situation is a nightmare scenario for many of
us. But the extent of the impact of the credit crunch on your
finances differs dramatically according to how old you are. If you
are young, in a reasonably secure job and hoping to buy your first
home sometime soon, the current turmoil could actually be a good
thing. But if you are close to retirement, have student children who
depend on you for funding and still have debts of your own to pay
off, it is likely to be a disaster.

This week, we will examine the problems that the credit crisis can
cause people in their twenties and thirties. Next week, our experts
will tackle the difficulties facing those nearing retirement age, and
those who have already stopped working.
Twentysomethings

First-time buyers

For at least the past five years, rising house prices have made it
almost impossible for first-time buyers to purchase a home -
particularly in central London.

But with prices falling 10 per cent on average since last year,
according to the Nationwide, property is becoming more affordable.
Homeowners with a deposit could secure a good deal, particularly with
the government's waiver of stamp duty on properties up to £175,000
until next September.

Simon Roberts, of Roberts Newby estate agents in Buckinghamshire,
says: 'Many homeowners are taking a very sensible and realistic view
of the market and are adjusting their asking prices accordingly,
while new-build developers are slashing their guideline prices, which
will allow first-time buyers a chance to enter the market. If first-
timers are prepared to take the chance, there may never be a better
time for them to buy.

Savings

Falling property prices might be a bonus, but if you can't get a
mortgage then you won't be moving anywhere. There are no 100 per cent
loan-to-value deals left, which means first-time buyers must save up
enough money for a 10 per cent deposit, if not more. Andrew Hagger,
of price comparison site Moneynet.co.uk, says: 'Saving isn't easy,
but if you really knuckle down and save hard, then this time next
year you might have a deposit in place to help you buy that home -
particularly if the price of property continues to fall.'

Hagger says you should make the most of your tax-free options by
saving into an Isa first, such as Manchester building society's
Premier Isa, which pays 6.5 per cent interest. But he adds: 'If you
are saving for something major like a house deposit, then go for a
notice account, as you'll get a higher rate of interest. Or you could
pick a fixed-rate bond and easily earn over 7 per cent interest on
it.'

You'll also need to build up a good credit history before banks and
building societies will lend to you. Make sure you're on the
electoral roll, that all your bank accounts are registered at the
same address (and not split between your parents' address and your
rental address, for instance), and pay your mobile phone bill on
time. This will build up a your profile as low-risk in the eyes of
the banks and may make it possible for you to get a credit card or a
mortgage.

Pensions and investments

The stock market may seem a frightening place to put your money right
now, but Tom McPhail at asset management specialist Hargreaves
Lansdown says twentysomethings should jump right in, so as to make
gains when the markets recover from the credit crunch. 'When you're
young, you can take the kind of investment risks that you simply
can't in your fifties. It doesn't matter so much if your investments
go down in value, because you've got time on your side for them to go
up again. By making regular investments into the stock market now,
you will be able to capitalise on the credit crunch. There's no point
sitting on the sidelines and then trying to jump in when conditions
start improving. By then, you'll have missed the upsurge.'

McPhail also urges young people to do something about a pension. 'If
your employer offers you a pension scheme, don't opt for the default
investment fund. It's much better if you choose where you want your
money to go and make active decisions about your own money. The worst
thing you could do is let your money sit in a low-risk or cash fund -
that's what you should be thinking about when you're 60, not in your
twenties. A good pension doesn't happen by accident and sooner or
later you're going to have to get to grips with your long-term
finances.'

Work

Graduates who were expecting lucrative, high-paid jobs in the banking
sector may have to think again - this year's 'milk round' (the annual
recruitment drive by companies visiting universities to snap up new
employees) has already shrunk.

Dee Pilgrim, editor of student careers magazine Real World, says: 'A
lot of companies have already said they're not going to be recruiting
graduates for next year's intake, or that the number of graduates
they will hire will be curtailed. The milk round will certainly get
tougher and even more competitive. Times are tough, and you will have
to prove yourself.'

To improve your chances, get as much work experience in your chosen
field as you can - with more competition for jobs, you'll need an
outstanding CV.

--- Thirties and forties ---

Mortgages

The big concern for this age group is whether they can remortgage. If
you bought a couple of years ago, it could be that your property is
worth less than you paid for it and you may struggle to get a loan.
Some homeowners will also have bought with friends or even strangers
a few years ago and will now be coming up to remortgage. This could
be problematic if one of those on the mortgage contract has changed
his or her mind and wants to move out.

Where more than one person applies for and is offered a mortgage, the
loan will be made on the basis that the applicants are 'jointly and
severally liable'. Simply, this means that each of them is liable to
repay the whole of the mortgage if the others are unable or unwilling
to do so. 'People who buy together should draw up a legally binding
agreement outlining what happens if one wants to leave the property,'
warns Richard Morea of mortgage brokers London & Country.

James Cartlidge of shared mortgage specialists Share To Buy says he
has seen some people getting around the problem by switching names on
the mortgage contract. 'We've had two cases recently of children
replacing their divorcee dad on the mortgage and others where two
friends have bought the third friend's share of the property,' he
says. 'Others are finding lodgers when someone sharing their mortgage
leaves.'

Families

For many people in their thirties, starting a family is a priority.
If you are planning to have children, it could be wise to consider
moving somewhere that has a decent state school.

Private education can be cripplingly expensive - 14 years of day
schooling will typically set you back over £140,000, and if your
child is boarding, fees can exceed £20,000 a year. In real terms,
private school fees have risen by 20 per cent in the past five years,
according to the Halifax, bringing the average annual fee to £10,239.
The result of this is that, this year, there are just 18 occupations
in which the average worker could reasonably afford to send their
child to private school, compared to 30 in 2003.

The other option is to get saving now. 'If it costs £10,000 a year
for a private day school today, be prepared to pay £18,000 [or
£14,000 in today's money] in 10 years' time,' says David Kuo, head of
personal finance at money website Fool.co.uk. 'To generate £14,000 a
year for seven years you will need to save £530 a month for 10 years
to produce a pot of around £98,000, assuming, rather optimistically,
that your investments grow at 8 per cent a year. In reality, though,
you can get away with less because you won't need the entire pot in
10 years.'

However, if your family plans mean you will need a bigger home, you
could actually benefit from the current property price slump, argues
Trevor Britton, managing director of Belstone Homes. He claims that
higher-price properties are dropping more in value than cheaper
properties, reducing the gap between them and making it easier for
buyers to trade up.

Pensions

The stock-market turmoil of the past year has hit pension funds hard.
The worst case scenario is that markets take as long to recover as
they did during the Great Depression - 20 years - which would mean
that the best anyone in their mid-forties now could hope for is that
their fund bounces back to where it was a year ago by the time they
retire. Most economists don't expect the downturn to be that long
this time around, but with the last 10 years crucial to the end value
of a pension pot, anyone now in their late forties hoping to take
early retirement may have to think twice.

People in their early thirties, of course, are still a long way from
retirement and pensions experts say they shouldn't worry. 'In 25 to
30 years' time this [current economic situation] will hopefully be a
painful but distant memory,' says Hargreaves Lansdown's Laith Khalaf.

Khalaf says that anyone 10 years from retirement should start 'de-
risking' their pension portfolio by gradually moving away from
equities and into fixed-interest products and cash. Those in a
company pension should also consider upping their contributions to a
company scheme, he says, assuming they can afford it.

There is a tricky balance to be found between reducing debt and
squirrelling away money at this point in life. While it is important
to keep some money as easily accessible cash - typically equivalent
to three months' worth of bills, or more if there is any prospect of
redundancy - it will save a lot of money in the long term to pay off
debts early. Overpaying on a mortgage each month will be particularly
beneficial for those who have not owned their property for long and
are looking to remortgage in the next year. When house prices are
falling, the size of your loan in relation to the value of your
property increases; by reducing the amount you need to borrow as much
as you can, you reduce your 'loan-to-value' (LTV) ratio and increase
your chances of getting a better interest rate.

guardian.co.uk © Guardian News and Media Limited 2008

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* Origin: [bux] entrepreneurship; wealth creation; capitalism

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