The Credit Crunch
I write this as the FTSE has fallen again to the lowest in 18 months, and with the concern of the housing market and the effect of the housing market, many experts’ opinion is that the UK economy is in trouble.
So what impact is this likely to have on a dentist working in the UK and what should you be doing now?
Just to summarise – the credit crunch started because mortgage lenders in America lent some money to people to buy houses. Unfortunately these people weren’t as credit worthy as they should have been and perhaps would normally have struggled even to get a credit card. The only reason they could afford the mortgages was because, during the first couple of years, the rates were fixed very low. However once these periods finished, they were charged higher rates, and not being able to afford them resulted in lots of homes being repossessed.
The problem was that in the meantime the banks who’d lent the money to these people had packaged those loans and put them together with some good loans and sold them to banks worldwide who either didn’t or weren’t able to check what they were buying. As it happens this turned out to be a bad mistake and has cost several chief executives their jobs and billions of pounds of shareholder value.
Many UK banks borrow money on the wholesale market which they then use to lend out (rather than using their own or investors’ money). However the big international banks have been so badly affected that they are not so keen or even able to lend money and as a result the money available has dried up – the so called ‘credit crunch’ that brought down Northern Rock.
As an example, two mortgage lenders we’ve used many times over the last few years, Mortgage Trust and Paragon, have closed their doors to new business as they simply can’t get the funds to lend.
As a result of all the above, it’s generally accepted that the Bank of England is likely to keep interest rates low to encourage consumer spending and offset some of the problems in the economy. However it’s expected that despite these likely interest rate reductions, mortgage lenders will fail to pass on expected cuts in the Bank of England base rate.
The facts bear this out as The Bank of England recently disclosed that over the past three months the difference between the wholesale cost paid by banks to borrow money and the cost they charge home owners for a mortgage has "increased significantly".
Over the past five years, banks have on average charged 0.1 per cent more than the wholesale cost of borrowing money for two-year fixed-rate mortgages. By November 2007, the average mark-up had increased to 0.6 per cent. This means a typical family remortgaging with a £200,000 mortgage will have to pay £1,000 more a year.
So this means less money for patients to pay for dental treatment. With an increasing number of dentists going private and extending their range of services to cosmetic and aesthetic dentistry, they are becoming increasingly dependent on consumer spending habits and these treatments are often subject to how much cash patients have available.
As evidence I know of a private dentist based in Gloucestershire who after the floods last year, heard comments from several patients saying that until their insurer paid out their claim they were unable to take on the treatment plans being offered.
So if I was a private dentist I would contact the likes of Medenta, dental care finance, GE Money or Chrysalis Medical Finance and make sure my receptionist or practice manager knew how to use the system to the full, perhaps even arranging additional training for the staff to make sure they could illustrate to prospective patients how affordable the treatment was.
Some of the advantages of using this payment method are to
- Provide attractive payment options for your patients
- Guarantee immediate settlement for you, the dentist
- Enable you to offer a broader and more appropriate range of treatments
- Offer 0% and low-cost payment plans to make treatment affordable
Raising finance for the practice is also likely to be an issue in the near future. One of the banks we recommend has recently announced that they will no longer be lending at 1% above base. Their reason was that the cost of funds like every other Bank has been affected as a direct result of the problems arising from the credit crunch.
Another lender has stated, “inevitably finance will be scrutinised more and potential rates may go up to recognise the potentially higher risk,” and yet another, “it's probably best not to assume we can replicate all deals we have offered in the past”.
As mortgage brokers we’ve already found that banks are tightening their credit checks and reducing the proportion of a property's value they will lend on, for both residential and buy to let properties. Assuming this is going to continue for the next few months it might be advisable to look at refinancing now whilst rates and availability are still reasonably favourable.
You could also take advantage of the likely rise in inflation by using 2008 as an opportunity to raise your fees. Provided you can demonstrate you’re worth the increase, such as investing in the practice equipment, your skills or the services you offer, the patients you want to keep are likely to remain patients.
As is always the case, change is inevitable and, despite the likely increased costs in funding or difficulty in getting finance, there are always opportunities for those that are prepared to work for it.
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