1. Current accounts

Notoriously poor on interest, these everyday financial necessities are now beoming popular again in an unexpected way. As savings rates plummet to as low as 0.29%, research from the Post Office reveals that one in five savers are now keeping their cash in a current account because it offers the best rate available. This means that if £2,500 was kept in Alliance & Leicester’s current account, over a year savers could earn £120.88, or £110 at Abbey.

Banks have even taken over the mantle from the building societies by offering the most competitive overall deals on both savings and mortgages according to Moneyfacts.co.uk.

Richard Norman, Post Office director of Savings, said: “Despite many people believing now is the worst time ever for savers, it is encouraging to see that 61% of people are continuing to save.” With only a quarter of those surveyed saying they had shopped around for the best deals, he advised people to chose carefully and switch if necessary at a time of hundreds of poor paying accounts. And remember, it may not be your existing bank that offers the best deals – don’t be afraid to switch and save.

2. Overdrafts

In a world where savers are suffering, it’s easy to assume that you have it all your own way if you’re a borrower. Not so. Overdraft rates are soaring as banks try to recoup their losses. You may not even realise that your interest rate has gone up unless you read the fine details of the updated terms and conditions you get in the post. Rates rose by as much as 7% with some banks last year. But according to the Bank of England, customers who go overdrawn on their current accounts are being stung by average rates of 18.62%, up from 17.58% this time last year. Shop around rather than just settling for what you are offered.

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3. Borrowing

We are being told to spend more but there is no sign of any loosening of the purse strings when it comes to getting credit. It’s a fine balance. You should avoid trashing your credit record by applying for dozens of cards or loans in the hope of getting one to say yes but don’t assume that if you are knocked back by one lender you will not be accepted anywhere else.

If you have a pretty healthy credit score (it’s important to check your records regularly and ensure there are no errors) then cut out the banks altogether and consider Zopa.com. The first people-to-people marketplace for lending and borrowing has arranged a cool £36 million in loans between its 250,000 members. Sub-prime borrowers are unlikely to become Zopa customers though. All Zopa borrowers – who undergo a stringent vetting process – are rated A*, A, B, C or ‘Young’ according to their creditworthiness and this will be factored into the interest rate they are offered.

If a borrower likes the rate that is available to them, he or she simply clicks the button to accept the loan. If they think the rate is too high they can revisit a day or two later to see if more competitive offers have been made. Once a borrower accepts a loan offer, Zopa arranges for the interest to be paid by direct debit into the lender’s holding account, from where it can be withdrawn or even re-lent. Borrowers pay a fixed fee of £118.50 which is added to their loan and reflected in the APR figures quoted. There are no hidden charges or any form of early repayment fee.

4. Debts

Latest research shows from independent advice campaigners Unbiased.co.uk shows borrowers must work an average of 83 days a year just to earn enough money to pay the interest on debts. If you’re concentrating on getting debt-free, make sure you’re paying as little as possible in interest. Consider switching credit card balances to 0% cards. These offers usually last for 12-15 months which will help you pay off more. For monster balances, there are many cards which offer a very low interest rate for the life of the balance. If you have a loan to pay off, make sure you know about any early repayment fees which would apply if you switched the loan to another lender for a better rate. You could still save if the new interest rate is low enough but you need to do your homework first.

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5. Savings

Don’t leave your money sitting in a limp account in the hope the rates will pick up soon. You can be sure that there will be a fanfare when they do increase and you can shop around for a new account then. Consider Premium Bonds, which offer a chance of tax-free prizes up to £1million. They also keep your capital safe but remember your money won’t grow. Alternatively, consider lending to save – via Zopa.com. At the time of writing, Zopa lenders are achieving returns of 8-12% gross (after Zopa’s 1% annual charge and bad debt are deducted, but excluding tax) depending on the group of borrowers chosen. The average rate of return lenders have been getting on loans made over the last nine months is actually more than 9%. And because these loans are at a fixed rate, so are the returns, typically over three years which is the most common term.

Lenders can make loans from as little as £10 but once they lend more than £500, the money is spread between at least 50 borrowers, to minimise risk. The lender specifies how much they are willing to lend and over what period (between one and five years). They are then asked to choose the price at which they are willing to lend. If a lender’s loan rate is too high, there will be no takers and the money will simply sit there in their holding account.

Borrowers can apply for loans of between £1,000 and £15,000. They are carefully assessed for credit worthiness and the affordability of the loan they are seeking. Lenders and borrowers enter into a legally binding contract with each other and Zopa manages the collection of monthly repayments. If a repayment is late, Zopa chases up the borrower in the same way a bank would and uses the same recovery processes if it comes to that. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading.

6. Student loans

Here’s one to pit the rate-starved savers against the ‘soap-shy’ students…. it may sound like a bizarre joke but it’s entirely possible that those with student loans will soon be owed money instead of having to repay what they have borrowed. How could this happen? It’s the crazy economy. The interest charged on student loans each year matches either the Bank of England base rate plus 1%, or the Retail Prices Index (RPI) in March – whichever is lower. The latter is forecast to be 0.1% which would push students into negative interest. But before the hall of residence and local pubs start filling up with happy borrowers planning to ‘reinvest’ their new-found wealth, it is in no way certain that the Treasury will allow this to happen. There’s nothing in the small print stating the rate can’t go negative, but there’s nothing to say a cap can’t be imposed either. .

7. Mortgages

The news has been full of stories about home owners who face a monthly mortgage bill of just 1p after the last bank rate announcement. Ben Cameron and his wife Nicola are being charged the sum after signing up for an interest-only tracker deal in December 2007. Their mortgage with Cheltenham & Gloucester tied their payments to 1.01% below the base rate, which then stood at 5.5%. Since then it has fallen to 0.5%, cutting their monthly bill from around £1,500 to zero. As their lender’s computer system cannot cope with zero payments, they are paying a nominal 1p per month.

Just make sure you don’t get too smug to set up a decent savings and/or investment vechile to build up the money you need to repay the capital of the mortgage. Research by LV= shows that 1.3 million interest only mortgagees (45%) have no vehicle for repayment behind them, while some 456,000 interest only borrowers could be in negative equity by the fourth quarter of 2009.

Mike Rogers, LV= group chief executive, said: “A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home. However, this strategy may have been overturned by current and predicted future falls in property prices. These people should therefore seriously consider investing as much as they can now, and regularly, to help pay off the mortgage capital at the end of the term.We urge interest-only borrowers with no firm capital payment plans to review their options, save as much as they can regularly, and seek professional advice early if needed.”

Shockingly, LV= also found one in ten interest-only borrowers said they did not realise they were only paying interest and would need to find additional money to pay off the capital. Nearly half said they could not afford to put aside any additional payments, on top of the mortgage interest.

The message here is clear – make hay while the sun shines, but you’d be mad not to set aside some or all of the spare cash from a low-interest rate environment, for a rainy day…

The cost of an average home fell by 2 percent in June, data from HBOS, the country’s largest mortgage lender, showed on Thursday. Prices were 8.7 percent lower on the year, a bigger fall than at any time during the 1990s crash.

“It is fair to say we are now in the worst housing slide for over 50 years,” said Michael Saunders, economist at Citigroup.

Barratt Developments , one of the country’s best-known homebuilders, said it was going to lay off 1,200 people — a fifth of its workforce — because of the housing downturn. Nor would it pay a final dividend for 2007-08.

That took the total number of job cuts announced by homebuilders in the last week to around 4,000 as Persimmon , Taylor Wimpey , Bovis Homes and Redrow have all been warning of a sharp turnaround in business.

Austria’s Wienerberger , the largest brickmaker in the world, reported on Thursday a 10 percent drop in its core earnings for the first six months of the year, because of a collapse in homebuilding.

“The spread of the financial crisis to Great Britain triggered a slump in new residential construction beginning in April,” said Wienerberger.

SLUMP COULD GET WORSE

Hit by the global credit crunch, lenders have toughened up borrowing conditions, demanding as much as 25 percent of a home’s value as a deposit before making any new loans — until relatively recently 100 percent loans were commonplace.

Mortgage approvals have consequently collapsed, pointing to even sharper falls in house prices in the months ahead. Rising inflation, meanwhile, is preventing the central bank from offering any succour.

The Bank of England held interest rates at 5 percent on Thursday and analysts say it could be quite a while before they come down — experts are predicting a protracted and painful housing downturn.

Housebuilders could remain under pressure for a while and vulture funds are already circling them as their debt and equity prices fall.

With property market values sinking, housebuilders have been forced to write down the value of their land holdings. Barratt said it would cut it by around 85 million pounds.

Wienerberger Chief Executive Wolfgang Reithofer, meanwhile, said the company would close around 25 smaller plants in Europe.

He declined to give details, but added closures were most likely in weak markets such as Britain and Germany.

(additional reporting by Dan Lalor and Boris Groendahl in Vienna)

By Sumeet Desai, LONDON (Reuters)

And then there is the ongoing credit crunch.

The portents are looking bleak, the whisper is of recession. The Bank of England’s Monetary Policy Committee has a lot to ponder.

We asked the 10 financial experts who sit on the Sky panel when they expect the UK housing market to recover.

If the Nationwide has got its sums right, house prices have been falling for the last eight months.

First-time buyers seems to be waiting to see how far prices will fall and those who do want to buy are finding mortgages have become more expensive.

The panel feel this is the beginning of a long correction and it will be 2010 at the earliest before prices start rising again.

Angela Beech, Head of the Personal Tax Department at Blick Rothenburg told Sky: “It is doubtful whether we have ridden the worst of this yet given that redundancies are in the main being deferred for the time being – more families will be forced into debt to keep a roof over their heads.”

We asked the panel if they think the UK economy is headed for a recession. Half said yes and all felt the UK economy is set for several years of very weak growth.

Ian Templeman, from the Institute of Directors said: “I think we’re heading into a downturn. Whether it’s a recession or not, who knows, but it’s going to be tough economically and I think it’s going to last well into next year so I think we’d better get used to it.”

The high oil price and the soaring cost of almost every commodity is impacting on our standard of living.

The price of many everyday goods and services has crept up making many of us feel worse off.

We asked the panel if they think we will be feeling better off in six months time. All 10 said “no” unanimously.

Nick Parsons from NAB Capital said: “There’s a real squeeze on disposable income at the moment.

“That’s not to say that average earnings are going to fall but the amount of money you have to spend on utilities, food, petrol and taxes is going up and up and we don’t see an end to that anytime soon.

“I think there’s a real possibility that come Christmas we’ll be feeling worse off than we do now.”

The Bank of England faces a dilemma: does it lower interest rates to stimulate a slowing economy or does it raise them to combat inflation?

Which is the bigger problem? The Money Panel felt – correctly – the Bank of England would opt to do nothing.

All 10 members predicted rates would be kept on hold for the time being.

By Sky News

Analysts said Britain’s economy needed a rate cut to boost growth, but the BoE had to sit tight for some time because of high inflation caused by record-high oil prices and soaring food costs.

“Inflation risks will make the MPC very reluctant to bring rates down at any time soon, and we think the committee will try to ride the situation out for a few months and then cut rates early next year,” Investec Securities analyst Philip Shaw said following the BoE’s decision on British borrowing costs.

The BoE’s monetary policy (MPC) committee made the widely-expected announcement on borrowing costs after its latest monthly meeting which had begun on Wednesday.

The central bank will provide reasons for its latest rate call in minutes of the two-day meeting to be published on July 23.

“Some MPC members are likely to have continued to highlight concerns that high and rising headline inflation could feed into inflation expectations, core prices and/or wages,” said Lehman Brothers economist Peter Newland.

“However, other committee members … may have raised the issue of the need for rate cuts given the very weak tone to activity data in recent weeks,” he added.

Twelve-month inflation hit a 16-year high point of 3.3 percent in May, according to official data.

Meanwhile the economy grew only 0.3 percent during the first three months of 2008, the lowest quarterly expansion for three years amid the global credit crunch and a slowing property market.

In addition, weak manufacturing and services sector data published this week pointed towards a potential recession for Britain, economists said.

Last Thursday, the European Central Bank raised eurozone lending rates by a quarter-point to a seven-year high point of 4.25 percent in a move aimed at fighting record inflation.

A further major worry for Britain is a current downturn in its housing market. House prices in Britain slumped 6.1 percent in June compared with the same month last year, the largest annual decline for more than 15 years, home loans provider Halifax said on Thursday.

The news that prices fell at the fastest 12-month rate since March 1993, prompted warnings from economists that the country’s property market downturn could worsen.

Halifax, part of British banking group HBOS, added in its latest monthly survey that house prices dropped by 2.0 percent in June from May.

“Today’s data does nothing to dilute concerns that the housing market is in the initial stages of an extremely sharp correction,” said Capital Economics analyst Seema Shah.

“Slowing economic activity, combined with continued problems in the mortgage markets, suggest that further sharp falls lie in the pipeline.”

In June, the US Federal Reserve kept its main interest rate at 2.0 percent, saying the likelihood of a sharp economic downturn had diminished while inflation risks had increased in the United States.

The key rate set by central banks affects mainly short-term market interest rates. Long-term rates are set by the market on judgements of many factors and principally perceptions of how medium-term inflationary pressures are being managed.

Bank of England website

By Ben Perry AFP