THE UK has officially entered its “worst ever” recession on record – we look at how to best protect your finances.
It comes as Chancellor Rishi Sunak warned “hard times” are here after the economy suffered its biggest slump on record.
New figures from the Office for National Statistics (ONS) showed gross domestic product (GDP) fell by 20.4 per cent between April to June.
The latest slump means the UK has officially fallen into recession territory for the first time in 11 years, as the impact of the coronavirus crisis on the economy is revealed.
Economists consider two consecutive three-month periods where GDP falls as the technical definition of a recession.
GDP had already fallen by 2.2 per cent between January to March.
The latest figures come as UK unemployment rose by 730,000 workers since March after another 114,000 Brits lost their jobs last month.
It has been predicted that unemployment could treble to 3million this year.
If you're worried about your finances, we take a look at the steps you can take to try and keep your cash safe.
What does a falling GDP mean?
GROSS domestic product (GDP) is one of the main indicators used to measure the performance of a country's economy.
When GDP goes up, the economy is generally thought to be doing well so today's figures signal that the economy is doing poorly.
Negative growth often brings with it falling incomes, job cuts and lower consumption.
The economy is in recession when it has two consecutive quarters (ie six months) of negative growth.
Following the global financial crisis that started in 2007, UK GDP fell by 6 per cent.
This marked the deepest recession for 80 years.
The Bank of England (BoE) uses GDP as one of the key indicators when it sets the base interest rate.
This decides how much it will charge banks to lend them money, and is a way to try to control inflation and the economy.
So, for example, if prices are rising too fast, the BoE could increase that rate to try to slow the economy down. But it might hold off if GDP growth is slow.
The BoE cut interest rates twice in March due to coronavirus.
Base rate cuts means mortgage borrowers now typically benefit from lower rates, but at the other end of the scale savers earn less on their savings.
Check your finances – can you cut back?
Do a thorough check of your finances so you know exactly where your money is going each month.
Make sure you go through all your bills, as well as any disposable income you have.
Once you've got an idea of your spending habits, it's easier to see where you could make savings.
For example, can you switch energy provider to save money? Or can you make do with a cheaper mobile phone tariff?
Set-up a rainy day fund
Now you've got a better idea of your finances, work out how much you can afford to put away each month.
Having a stash of savings gives you a safety net to fall back on if something should happen.
For example, if your car breaks down or you need to replace an essential household white good.
How to switch energy suppliers
SWITCHING suppliers is the best way you can cut your energy bills. Here's what you need to do:
Shop around: Use a comparion site like MoneySuperMarket.comor EnergyHelpline.com to see what best deals are available to you.
The cheapest deals are usually found online and are fixed deals – meaning you'll pay a fixed amount usually for 12 months.
Switch: When you've found one, all you have to do is contact the new supplier.
It helps to have the following information – which you can find on your bill – to hand to give the new supplier.
- Your postcode
- Name of your existing supplier
- Name of your existing deal and how much you pay
- An up-to-date meter reading
It will then notify your current supplier and begin the switch.
It should take no longer than three weeks to complete the switch and your supply won't be interrupted in that time.
Keep checking: Make a note of when your new deal ends, so that you can switch before you get stuck on an SVT again next year.
Safety-proof your savings
Make sure your rainy day fund is then protected by the Financial Services Compensation Scheme (FSCS).
This scheme covers cash up to £85,000 per financial institution if the bank goes bust.
Secondly, check you're getting the best interest rates so you get the most out of your cash.
Use a comparison site, such as Moneyfacts, to check for the best buys.
The top easy-access rate is currently 1.16 per cent – however, you can earn more if you're able to lock cash away.
For example, the best regular savings rate is 2.75 per cent but you won't be able to access your money for 12 months.
Banks link savings rates to the Bank of England's base rate, which means if the base rate drops, savings rates drop too.
Consider fixing your mortgage
If you're due to remortgage, you may want to consider locking into a cheap fixed deal.
Mortgage rates are also linked to the base rate, and if base rate falls, so do interest rates on mortgages.
Just be aware that if you've been furloughed, you're unlikely to be able to borrow as much from your mortgage lender and you may struggle to remortgage.
You can use a comparison site like MoneySupermarket to compare the best remortgage deals.
How to cut the cost of your debt
IF you're in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis – Knowing your spending patterns is the first step to managing your money.
Work out your budget – By writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs.
Pay off more than the minimum – If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker.
Pay your most expensive credit card sooner – If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate).
Prioritise your debts – If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them.
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don't pay
Get advice – If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further.
Don't forget your debts
It can be easy to bury your head when it comes to debt, especially if you're already worried about your money.
But ignoring debts won't make them go away, so it's best to tackle any money issues head on.
Make sure you keep track of what you owe, and who to, and always prioritise repaying priority debts.
If you're really struggling, speak to your lender as soon as possible.
Due to the coronavirus crisis, loan providers, payday lenders and IVA providers have all started offering three month repayment holidays for borrowers.
However, keep in mind that payment holidays are seen as an extreme measure and your debt will still need to be repaid eventually, plus interest.
Always continue paying if you can afford to do so.
There are plenty of organisations where you can seek debt advice for free.
- National Debtline – 0808 808 4000
- Step Change – 0800 138 1111
- Citizens Advice – 0808 800 9060
What is a payment holiday and should you apply for one?
PAYMENT holidays are when a lender agrees to pause your monthly repayments for a set amount of time.
This has to be agreed in advance, so don't stop making your repayments until your bank has given you permission to do so.
The majority of lenders are now offering payment holidays, so get in touch with your bank to find out what help it can give you.
Most of the time, it'll require you to fill out an online form.
Typically, payment holidays are offered in extreme circumstances and are designed as an emergency measure to help you through a difficult financial time.
If you think you need to take one, you should speak to your lender to discuss your options – but do note that the break in payments doesn’t remove any debt or financial obligations.
Most lenders will also still charge interest during this time, so be aware that these costs will keep building up.
You should also always continue to make your normal payments if you’re financially able to.
Sue Anderson, head of media at debt charity StepChange, said: “If you can continue to make your normal payments without difficulty, then you should.
“Any temporary measures being offered by lenders don’t remove financial obligations – they are designed as an emergency measure to help you get through a period where your income may have taken a serious knock.
“However, if you need to use them then you shouldn’t hesitate to talk to your lenders."
While taking a payment holiday shouldn't affect your credit score, research from MoneySavingExpert has revealed it could still stop you getting a mortgage.
This is because many lenders rely on more than just your credit score when considering whether or not to give you a loan, such as Open Banking.
Lenders can then see whether you've paused any payments, which they can then use this information to decide whether or not they will lend to you.
Banks and lenders have been asked to extend the time customers have to ask for a payment break until the end of October.
However, it's best to get in contact as soon as possible if you're worried about your finances.
Here are the deadlines:
- Mortgage holiday – October 31
- Credit card holiday – October 31
- Personal loan holiday – October 31
- Car finance holiday – October 31
- Insurance holiday (car, pet, travel and home) – October 31
You'll usually need to apply directly to your bank or the company you've taken out the policy with. See the below links for more details:
Mortgage, credit cards and personal loans:
- Bank of Scotland
- Lloyds Bank
Insurance and cars:
- Direct Line
- More Than
Consider consolidating your debts
You could also clear your debt by consolidating it into one loan or card, which would mean you're effectively borrowing money to pay off what you already owe.
The plus side of this, is you can merge all the money you owe into one monthly repayment with just one lender.
But it's worth doing your research before committing to a loan, as borrowing more than you can afford to pay back can also lead to a debt cycle that is difficult to get out of.
Explore all your options and ask companies what impact this will have on your credit score, and what happens if you miss a repayment.
Any loan application will appear on your credit record, so be careful not to make multiple applications or you could end up damaging your credit score.
Use a tool such as MoneySavingExpert.com's eligibility checkers to check which cards and loans you're likely to be accepted for without it hurting your credit score.
Keep pensions and investments diversified
Now could be a good time to check where your pension or investments are sitting.
If all your savings are in one place, you may want to spread them out so your pots are well diversified.
Being overexposed to one asset class or one particular company could put your savings at risk if something goes wrong.
Credit card and loan payment holidays have been given to 1.7million Brits during the coronavirus crisis.
Meanwhile, furloughed workers are three times more likely to have defaulted on a payment – what help is available?
In January, figures showed there has been a huge jump in Brits taking out payday and short-term loans in the previous 12 months.
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