The Credit Crunch

Is the era of cheap, easy money over for good? It certainly looks that way for the foreseeable future.


Although the circumstances that heralded the start of the credit crunch appeared last August , namely the rise in inter-bank lending rates, the unwillingness of banks to lend to each other, and the consequent demise of Northern Rock, the financial effects have only been fully realised this year.

We are seeing both an end to ‘cheap money’ and a significant reduction in availability of credit for both personal and business purposes.

The UK’s obsession with house prices, and the delusionary feeling of wealth that has created, has been seriously dented.

Price reductions of between 20% and 35% have been widely forecast, which will have serious repercussions of negative equity for many people who have bought houses during the last 3 to 4 years, and for numbers of people who have been withdrawing equity for various purposes including school fees, holidays etc.

Many people need to ask themselves the tough question – would I get the mortgage that I have now if I was applying for it now?

The ability to remortgage every couple of years to take advantage of another cheap deal will tend to be restricted to those with a high level of equity in their house (e.g. 50%), many of the rest of us will end up on our current lender’s standard variable rate which will be significantly higher than we have been used to paying.

Moving house may become problematical for people with high mortgages as, even without negative equity, new lenders are less keen to lend on high income multiples where loan to value ratios are high.

The ‘buy to let’ market had been encouraged as a savvy alternative to pensions. The forecast of ever increasing prices based on limited supply and exponential demand is not looking so sensible any more.

The two mathematics teachers who built a ‘buy to let empire’ in Ashford confidently predicted that house prices would double every ten years- so much for the wisdom of teachers! With average yields of 4% or so and interest rates at 6.5% and above, the ‘buy to let’ model will only work if house values increase by at least the rate of inflation.

Whilst this is likely over the long term, a short term significant decrease in values will wipe out a lot of the wealth of highly geared recent ‘buy to let’ investors, which may take a decade to rebuild.

As far as business owners are concerned the Banks’ reassessment of business risk and reluctance to lend will present significant challenges.

The landscape has shifted, and a business that was considered a sound proposition a year ago may now find itself perceived by it’s Bank as undercapitalised. It is certainly already a lot more difficult to borrow money for business purposes, be it for the acquisition of commercial property or for working capital, and it is also certainly getting more expensive.

For businesses adversely affected by the recession and unable to secure funding the result may be insolvency – it is likely that a lot of perfectly good businesses will fail simply because they are undercapitalised and have not thought far enough in advance about their funding or allowed sufficient margin for error.

No-one can fight the market. House prices will find their new (lower) level and the lessons learned during the last year will undoubtedly ensure that future rises will be far more modest, based on affordability rather than unlimited cheap credit.

The cost of borrowing for many businesses will be significantly higher as the ability to ‘shop around’ for better rates is reduced. A commercial mortgage that could have been arranged at 1.5% above base a year ago might now be priced at 3.5% above base, and overdraft rates are generally increasing – some to quite astronomic levels!


In order to survive in business you need to:

1. Carefully consider your funding requirements, at least a year ahead.

2. Consider the structure of funding – mortgage, term loan, asset finance, factoring and overdraft, and the mix that is right to give the business stability and some margin for error.

3. Think about whether you have enough of their own capital in the business. Don’t expect the Bank to give you all the money just because you need it.

4. Think about other sources of finance, perhaps even family and friends. A bit of diversity in funding can certainly add strength.

5. Plan ahead! Being in a position when you urgently need funds is a much weaker position than putting forward a proposition that needs funding.

The next few years will be difficult for business. It may take that long until the credit markets shake themselves out and consumer confidence returns.

Money is not going to be cheap or easy to borrow. Sound and sensible financial advice has always in short supply, but has never been more necessary.

For further information please contact Hugh Davies by email or call 01722 336647.