The Calm After the Storm

The impact of the financial crisis upon some is all too apparent. Millions have lost jobs, defaulted on mortgages or other financial products and seen their life savings wiped out, pension funds have collapsed, and governments have mired themselves in billions of pounds worth of debt.

For some, however, the impact is less obvious. For example, the fall of the pound against the euro is as a result of the greater stability of the eurozone in this economic climate, great news for manufacturing in the UK, but not so much for tourists. Perhaps most tellingly of all, however, is the fact that £815bn was knocked off the value of UK households in 2008 alone. That means, per person, because of the financial crisis (without considering the long term effects of added taxation) everyone in the UK is £31,000 worse off.

This may not be immediately apparent, it's mostly in the form of decreased value on houses, but this has meant that many people now find themselves approaching or in negative equity on their mortgages. The Bank of England slashed interest rates to help these people and stop them having to default, but this, in turn, has penalised savers.

So, what to do if you have carefully accumulated your savings for the last decade and now your money is not giving you a return? Well, you could take a look at a different bank account, Alliance and Leicester are one bank offering good returns (6% AER for the first year*) at the moment, or you could invest your savings in your own debt.

Unless you rent or have the luxury of owning your own home, the absolute best thing that you can do is pay off some of the mortgage. Whilst you might be an average of £31,000 worse off, the low interest rate means that your money goes further than usual in paying off your mortgage, when the housing market recovers and the interest rate does as well, your house may be worth more but it'll cost you more for each mortgage payment you make.

Even the best bank accounts offer little over 5%, whilst loans can cost as much as three times that much. An equivalent amount of debt and savings will cost you three times as much interest as you make. Considered in this light, the case for paying off debt wherever possible is quite strong.

*Rate correct at time of writing. Check the A&L website for up to date savings and bank accounts information.