We have heard the term “Credit Crunch” over and over again over the last few months, but what is the Credit Crunch and how is affecting us globally?

The credit crunch occurs when there is a lack of funds available in the credit market. This means, companies either do not have the funds availble to lend at the rate they used to, or do not wish to lend for fear of bankruptcy or default.

Over the last 10 years, borrowing for businesses and personal loans has been far too easy to obtain. People got into the habit of borrowing without a thought that things could take a turn for the worse which would leave people in a position where they could not afford to repay their debt.

This could happen for a number of reasons such as failed businesses, or on a personal level due to job loss, divorce, addition to family or a whole number of reasons.

Companies who lent money out could suffer a loss because of the failed repayments which meant they no longer have the funds to lend, or are more wary about lending for failure of repayment.

Businesses who rely on credit to expand their operations, are now finding it more difficult to borrow as the funds are not availble on the scale they were before. If they are not able to obtain the funds they need to continue in business, they could loose their business as well as putting people out of work because they simply can’t afford to pay them.

If people are loosing jobs, then they are left in a position when they do not have the income to repay their debts which means once again, the credit companies are loosing money. It is like a vicous circle.

It is as though the honeymoon period of easy borrowing has come to an end and reality has struck and we are now left in a position to find a solution to the problem.

The credit crunch is something that is going to affect us for a long time to come, but one positive thing that has come out of this is that we recognise their are lessons to be learnt when it comes to borrowing and lenders will be more restrictive when it comes to offering credit.

The credit crunch is having a snowball effect up and down the country including local councils which are also feeling the effects.

Highland counsellors are set to makes requests to Westminster to write of the regions housing debt of £153million.

The credit crunch has affected council house sales in the region which means council income has fallen by £2million.

The council would need to borrow almost £2million in order to meet the required revenue costs set out in 2008/9.

The money is used for things such as repair and maintenance of council house stock and investments so that new homes can be built as well as creating jobs in the area.

Counsellor David Cameron believes that in order to get the economy going again, homes need to be provided, which in effect creates new jobs resulting in the generation of spending in the local community.

MP Danny Alexander said:

“The pressure of the credit crunch and the need to have public money available to kick-start affordable housing, get the building sector going and getting the homes built that people need, we should be going back to the Government and putting across the case.

“The current economic climate make that case even stronger.”

The Government have surprised the financial industry by implementing the mortgage pre-action protocol earlier than expected.

The mortgage pre-action protocol is set out to ensure that mortgage lenders and home puchase plan providers have discussed and agreed alternatives to prevent prevent home repossession when borrowers fall into arrears with their mortgage repayments.

If lenders apply for repossession, they are now required to tell the court exactly what they have done to comply with the mortgage pre-action protocol.

The aim of the protocol is to ensure home repossession is a last resort and not the first. With the credit crunch hitting so many mortgage borrowers at this time, more and more people are facing repossession, therefore it makes sense that the Government brought the protocol forward to protect borrowers from un-necessarily losing their homes.

When someone falls into arrears with their mortgage payments, it is up to both the lender and the borrower to discuss the cause of the arrears and whether or not the cause is temporary or long term.

They should also discuss the borrowers financial circumstances and proposals of repayment.

The lender should advice the borrower to make contact with the housing dept. and where necessary, refer the borrower to appropriate sources of independant debt advice.

If there is any viable way that the borrower can show that they are able to repay their arrears at a reasonable time, then the lender should not go for a repossession order.

If you find yourself in arrears, then it is important that you are open with your mortgage lender and give as much information about your current position as possible so that an alternative agreement can be put into place to prevent home repossession.