Global stock markets have suffered heavy losses over the past month. Here Times Money explains what has caused the sell-off and how it may affect you.

What has been the cause of the recent stock market turmoil?

The markets have been thrown into chaos by a crisis in sub-prime mortgage lending in the United States. People with credit problems were offered large amounts of money at low introductory rates of interest. When the cost of these mortgages increased, many borrowers could not afford the repayments, causing huge losses to the banks and hedge funds that had backed the loans. Worries over the extent of these losses have driven up the cost of borrowing for companies and undermined confidence in stock markets.

Why are people so worried?

It was initially assumed that the losses from sub-prime lending would not be felt outside the US. The reality has begun to look different. Eight days ago the FTSE 100 index, which tracks the top 100 companies listed on the London Stock Exchange, had its biggest fall in six years and, despite some signs of recovery at the start of this week, stocks in Europe and Asia have continued to suffer heavy losses.

If the problems in the US sub-prime mortgage market spread to the rest of the world, or the weak US housing market undermines consumer confidence in America, global economic growth could be hit.

What does this mean for my mortgage?

The good news is that the Bank of England may now be less inclined to raise interest rates, giving a reprieve to borrowers. The Bank had signalled that it may need to raise rates to 6 per cent before the end of the year to curb rising inflation. The bad news is that some mortgage lenders, such as Northern Rock, could be forced to raise their rates anyway because the cost of borrowing money from other banks continues to soar. Most sub-prime lenders have signalled that they will raise rates on fixed-term deals or have withdrawn their range.

What does this mean for my pension?

It is likely that some of your retirement savings are invested in equities and the value of your pension will have taken a battering. The longer it takes for markets to recover, the longer it will take for your fund to recoup the money. Those who are retiring now and are heavily invested in equities could suffer a 10 per cent reduction in pension income. However, most people’s pensions are moved away from equities into fixed-interest investments as they near retirement to insulate them from such turmoil.

What does this mean for my investments?

Your stock market investments are almost certainly falling in value. However, if your portfolio contains a mix of different investments, you will be faring better. For example, bonds tend to be more resilient when share values are falling.

What is likely to happen next?

Many experts believe that the stock market decline will last another few months at least, which could dent the value of investments and pensions in the longer term.

What should I do now?

Don’t panic. Provided that you are investing in the markets with a five to ten-year focus, there is a strong chance your investments will recover. However, this would be a good time to review your holdings. Those who have most of their portfolio in high-risk markets may want to consider alternatives. Prepare for further volatility in the short term, but be aware that you could lose out if the markets bounce back.

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