When the recovery comes, you better be ready for it
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For some people, the economic recovery could be just as dangerous as the slump.
There are times when it feels like the financial crisis is going to last forever, but it won’t. At some point, the slide will stop, the recovery will come. It may take longer than we would like, but it will happen. And when it does, all sorts of strange things could happen, taking many of us by surprise.
Just the job
So what might any recovery look like? On the whole, a lot nicer than what we’ve got now. Finding a job should become easier. So will keeping your existing job. One day, you might even get a halfway decent pay rise. If things go really swimmingly, you might even get an inflation-busting pay rise (remember them?).
Well, we can dream, can’t we?
That will be good news for jobseekers, recent graduates, workers in struggling companies or people clinging gratefully onto their dreary old job because something is better than nothing.
But it won’t all be good news.
When the economy finally recovers, something shocking will happen. The Bank of England will start increasing base rates from their historic low of 0.5%.
Base rates have been so low for so long that we are beginning to act like they will last forever. But they won’t. And when they start rising, they could rise a lot faster than you think.
Remember how quickly they were slashed during the financial crisis? Then imagine that process in reverse.
This could lead to a massive payment shock for any homeowner with a tracker or variable rate mortgage. It would be a particular shock for somebody sitting on a pricey standard variable rate (SVR), who may already be paying anything between 4% and 6%.
If you’re paying that much when base rates are 0.5%, imagine what you would be paying if base rates return to their historical average of around 5%.
Especially since lenders are at liberty to hike their SVRs at a faster lick than base rates.
Many of us could quickly end up paying double digit mortgage rates. Talk about a payment shock.
It’s not going to happen yet, but it will.
Are you ready for that?
If that does happen, we might see a sudden surge in property repossessions, something we have been spared so far. Mortgage lenders may be faster to take possession, as they will feel more confident of getting their money back by flogging off the property in a more buoyant market.
For hard-up homeowners, the recovery could have a sting in the tail.
Thankfully, many have already realised this. Homeowners paid down another £8 billion of mortgage debt in the three months to September, the 18th consecutive quarterly injection of equity, according to Bank of England figures. The more you can reduce your mortgage before rates start rising, the better. Read more in Overpay your mortgage and save thousands.
When we begin to see more solid signs of a recovery, you might also want to switch to a long-term fixed rate as fast as you can, before they start getting more expensive.
If anybody should celebrate a recovery, it will be savers. They have been getting a rotten return on their money for the past four years, as central bankers driving down base rates to bail out borrowers.
When that first base rate finally comes, they should throw a street party. Unless they have just locked into a five-year savings bond paying a measly 2.5%, in which case they will be serving tea and arsenic.
When we finally see signs that the economy is picking up, it may be worth keeping your savings on instant access, so you are ready to cash in. And be prepared to switch savings account regularly, to take advantage of the stream of new savings products that should hit the market to cash in on savers’ euphoria.
Savers might have to wait a few more years before this happens, but one day, their nightmare will end.
I hope they’re ready. The surprise could kill them.
As far as I can see, the only way the UK will ever be able to reduce our mountain of debt is to inflate it away. Isn’t that the unspoken assumption behind quantitative easing, the Bank of England’s controversial programme of virtual money printing?
At 2.7%, as measured by the consumer prices index, inflation has remained stubbornly over the Bank’s target of 2% for years. Once the economy recovers, inflation could catch fire.
If that happens, prices could outstrip wages, and interest rates could rise even faster than expected, upping the pressure on all of our wallets.
I’m not sure any of us will be ready for that. But again, paying down your debts and cutting spending obligations could help.
The rate we’re in
Higher inflation will be particularly tough on pensioners, especially those who have recently bought an annuity, the income for life you buy with your pension.
Annuity rates have crashed around 20% since 2008, thanks to falling interest rates and gilt yields. The one million pensioners who have bought an annuity since the crisis will get 20% less income for the rest of their life.
They have a right to be angry. They’ll be even angrier when interest rates and inflation start rising.
Many people have put off buying their annuity in the hope that things would get better, only to see rates worsen. If you are set to retire in the next two to three years, you have a tough decision to make.
It is bad enough locking in when rates are falling, even worse when they are finally starting to rise. If the recovery is bedding in by the time you retire, you might want to wait.
You do have some flexibility. You don’t have to buy all your annuity in one go. You could use half your pension to buy an annuity, and hold back the other half in case things get better.
Alternatively, if you got a fairly big pension pot, you could leave it invested and live off the income, while hoping it will rise in value if the recovery takes stock markets with it.
You might need to take specialist pensions advice for this one.
These things time
Maybe I’m running ahead of myself. The recovery is still some way off. In fact, we might have to endure a triple-dip recession first. But things have to get better at some point.
Just make sure you are ready for it when it comes. Because for some, the recovery could prove almost as big a shock as the slump.