Recession: A survival guide

Recession: A survival guide

After 15 years of economic growth, there was a whiff of recession in the air in Britain this week. Halifax reported that house prices fell for the third month in a row for the first time since 1995, and activity in the service sector dropped to its lowest in more than four years.

In the summer, City analysts were confidently predicting that the Bank of England would push the bank rate to 6% or higher in an attempt to quell mounting inflationary pressure. By the time dealers left last night after another tumultuous week, the feeling was that Threadneedle Street would be forced to cut interest rates four times next year to boost a fast weakening economy.

The explanation for the change of heart is simple. Five interest rate rises between August 2006 and July 2007 were just starting to have an impact on the UK economy when financial markets took fright in late July at the mounting losses institutions were facing from US real estate. Instantly, banks became far more cautious. They hoarded cash and were warier about who they would lend to. Interest rates in the City's money markets rose and remain high despite the quarter-point cut in the bank rate to 5.5% this week. Welcome to the world of the credit crunch.

Here our Money team present some advice on how to make your finances recession-proof:

Mortgages

Homeowners enjoyed some good news this week with the interest rate cut, which means lower borrowing costs for millions.....continued below

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of mortgage-holders, but dark clouds are gathering.

This week the Financial Services Authority warned mortgage lenders to prepare for the credit crisis to get worse, and urged them not to race to repossess the homes of customers who got into serious financial trouble.

It also pointed to potential difficulties for other borrowers next year, when more than 1m short-term fixed-rate mortgage deals will expire. Some will face the choice of paying their lender's (often much higher) standard variable rate, or trying to find another competitive deal. There are fixed-rate mortgages on offer from 5.39%, but they typically involve paying hefty fees (£999 is pretty standard).

However, with analysts predicting that rates could be cut again and might even fall to 4% by 2009, it might pay to wait before committing to a fixed rate in the next couple of months.

If you do get into difficulties, talk to your mortgage lender. Don't ignore the problem. Look at your overall expenditure to see if there are areas of non-essential spending where you can cut back. Some people will be able to switch to a more competitive mortgage.

There are more drastic ways to reduce your monthly outlay. One is to increase the term of the mortgage loan to cut the monthly payments. Some lenders will go up to 40 years. But stretching the life of a loan means you could be storing up serious future problems.

Another option for those with repayment mortgages is to switch the loan to "interest only". That means you only pay interest, not capital. Typically, if you switch to interest only, your payments will go down by about a third. If you go interest only, try to move back to a repayment basis as soon as you can.