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In most years the nation’s economy grows, which means the country and the people in it generate more wealth than the previous year. But, periodically, something will happen that disrupts this and causes the economy to shrink, which is known as a recession.
Recently the coronavirus pandemic has caused a recession in the UK, the previous one followed the financial crisis in 2008.
Officially it is only a recession when the economy shrinks for two quarters in a row. One quarter is three months, so that is six months in total. Across the first two quarters of 2020, the economy shrank by more than 20% because of the impact of the first coronavirus lockdown. This was the largest recession on record.
The economy bounced back in the summer but is expected to have contracted once again in late 2020 and early 2021 due to the second and third lockdowns. This is known as a double dip recession, but it is likely once lockdowns have lifted there will be a sharp period of growth.
In the long-term it is hard to tell whether the UK will experience sustained growth or if the effects of Covid will continue to drag on the economy. There are other influences that may play a part too, such as Brexit or another crisis that isn’t on our radar yet.
Every recession is different. It depends both on its causes and how governments respond. During the most recent downturn, the government introduced schemes such as furlough and the self employment income support scheme to try and save jobs so the economy can bounce back quickly. Interest rates are also historically low, which makes borrowing for a mortgage more affordable.
By contrast during the recession of the early 90s there was less support to keep people in work and interest rates went up to 15%. But the recession was nowhere as deep as 2020.
Whatever actions governments take recessions usually have several shared impacts. People are likely to lose their jobs, which leads many to take on more debt. Some struggle to repay loans such as mortgages which means their homes may be repossessed. Wages may also stop growing, causing people to struggle financially.
As confidence in the economy drops, house prices may also fall as people hold off making big purchases and taking on larger mortgages. If you are able to stay in your home, you can ride this out and wait for the market to recover. However if this pushes you into negative equity — when your mortgage is worth more than your home — and you need to move, you will have to make up the difference.
Whether or not it looks like we are heading for a recession, it is always good to be prepared for a rainy day.
The first place to start is by addressing any expensive debt. For example, if you have credit card debt with an expensive interest rate, pay as much off as you can or try to reduce its cost by moving the balance to a 0% alternative.
Alongside controlling debt, try to tighten your budget. This could mean switching all your providers such as utilities to cheaper alternatives or cutting out unnecessary costs, such as a gym membership you rarely use. Also check you are receiving all the benefits you are entitled to.
Once you have identified where you can cut costs, save any money left over and build up a buffer to protect you if an economic storm blows in. It is recommended that you have enough to cover your outgoings for at least three to six months.
If a recession hits and you find yourself in financial trouble even after doing all of the above, there are several steps you can take.
If you own your home contact your mortgage provider to see if it can help. It may be able to move you onto an interest-only mortgage or give you a mortgage payment holiday. This is when your mortgage repayments are temporarily stopped. However you will have to pay them at a later date and the extra interest they attract will be added to your balance. You can also apply for grants to help you with utilities debts.
You may struggle to cover your outgoings if your income has dropped significantly. If this is the case there are lots of places to turn to for help. The best place to start is a free debt charity.
They will help you assess your options and guide you to a solution that suits your circumstances such as a debt relief order, debt management plan or an individual voluntary agreement. These are different ways to manage your debt depending on its size and your income. As a last resort there is bankruptcy which wipes all your debts but will usually involve losing your home and damaging your credit record, making it harder to get a mortgage in future.
In some cases selling your home may be worth considering. It could provide you with much-needed funds to take control of your financial situation and help you through a recession. However, you need to think carefully about whether it is right for you and make sure you have somewhere else to move to.
If you decide to go ahead, we can buy your home in as little as seven days. We do not use estate agents so you will not be charged their commission, and we instruct and pay for solicitors to help you keep costs to a minimum.
We’re always happy to chat about our service and how we can help you, so please get in touch.