Reducing the balance on their credit card
The main source of their worry for Janet and John was the growing outstanding balance on the credit card. They recognised that it was ridiculous to pay a rate of interest which was double the rate they were paying on their mortgage. The answer, they thought, lay in borrowing more - say another £10.000 on their mortgage. This would enable them to pay off the credit card debt and establish a cash reserve for the difficult months ahead. After all, Janet told John, they should get June into the creche full time eventually and that was much, much cheaper than the private child minder. They would have to put off having the second baby for two or three years until John got promotion or a higher paid job - but that was not the end of the world.
So they went to see their building society manager. He was sympathetic, but this time there was a problem. Since they had increased their mortgage, house prices had stopped rising. In fact, in their particular area, where jobs were increasingly hard to come by. house prices had actually started to fall. They weren't in a 'negative equity' situation yet - but there was no spare equity in the property on which a larger loan could be given.
They tried three or four other lenders. The story was the same with most of them. One offered them a bigger mortgage, but the rate of interest was higher than they were paying on the existing mortgage, with a lot of up front fees and charges.They felt that would only add to their problems.
They sat down to talk things through. The} realised they could get a personal loan of £3,000 from their own bank at an interest rate of 11% APR - more than a mortgage, but less than the credit card interest. It wouldn't help them with a reserve, but it would enable them to pay off the credit card. It would cost (including capital repayments) £65 per month. Their anxiety about the escalating credit card debt was such that they decided to go for it and signed up.
The increases in interest rates of the last two years were not just affecting Janet and John. They were having an effect on the economy as a whole. Economic growth started to slow, house prices stabilised and unemployment started to rise slightly. Slightly maybe, but John's job was one of those affected. In October 2006 he was called into his boss's office and told that they were having to let some staff go as their customers had cut back on investment in computer hardware and software. They would prefer not to make him formally redundant, and would offer him three months' salary in lieu of notice if he voluntarily resigned. He realised that this was more than he would get in statutory redundancy pay and the one month's notice to which he was legally entitled. Also, it would be tax free. He decided to take the offer. After all, he and Janet had the mortgage protection insurance in case of illness or unemployment and the lump sum payment of the salary in lieu of notice would help with the cash flow, particularly if he got another job quickly.
Unfortunately, he didn't. Christmas came and went and that was inevitably expensive. After all. they couldn't let June miss out on Christmas because they had temporary problems.