Over the years mortgage providers in the US and many European countries have been lending money to large numbers of high-risk borrowers without realistically assessing the increased risk and reflecting this in mortgage payment arrangements. As a result in 2008/09 many mortgage lenders found themselves overexposed to what became known as ‘toxic loans’ provided to the homeowners unable to keep up with their mortgage payments.
Many other financial institutions were drawn into this crisis by the complexity of lending arrangements made between these institutions. As the crisis developed banks have experienced huge financial losses and some large previously well-respected institutions have either gone bust or been bailed out by national governments.
What has been the impact on consumer spending?
As a result of the global financial crisis banks have become increasingly reluctant to lend money and the credit upon which much of the growth in western economies has been built in recent years has become more difficult to access by individual and corporate borrowers as financial institutions attempt to rebuild and repair their capital bases.
The slowdown in lending led to a dramatic reduction in demand for, and price of property in the UK.
Alongside this consumer confidence has declined and consumers have been reluctant to spend in the way that they have previously.
Falling house prices, reduced consumer confidence and spending are contributory factors in the continuing global economic slowdown or recession. The drop-in consumer confidence has been exacerbated by significant increases in fuel and food prices.
What has been the impact on the mortgage availability?
Although mortgage providers are continuing to lend, more restrictive arrangements are in place to manage demand. It is likely to be more difficult in the short term to obtain 100% (or greater) mortgages and borrowers will need to provide greater amounts in deposit to secure loans. Fixed rate and other incentivised mortgage deals are likely to be less attractive than they have been in the past.
Borrowers with Fixed rate deals that are coming to an end may find themselves faced with increased payments.
How can I cope with the credit crunch and recession?
Actively managing your household budget is likely to make a significant difference to how well you can get through the difficulties currently experienced by the UK and Global Economy:
- Review your household budget. Visit the section on Household Budgeting for more advice on how to approach this.
- Look at options for reducing the cost of unsecured debt particularly if you are not repaying credit card bills in full each month. Try to avoid missing payments to protect your credit rating. If you rely on credit to manage your household expenses, consider whether you can do something to reduce your dependence on credit.
- If you have a fixed rate mortgage coming to an end, speak to your existing lender first but consider other lenders to ensure you find the best value.
- Discuss concerns with your lender if you are finding it difficult to manage your mortgage repayments. There may be options you can consider including a payment holiday, extending the term of the mortgage or making payments of interest only for a period.
- If your relationship with your partner has been affected by the pressure of any financial difficulties you should consider speaking to a counsellor to try to take constructive action to address this.
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