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The Credit Crunch and how
it affects you
Mortgages
Karen and Richard Carpenter would probably have said it best:
"We've only just begun…"
Since the beginning of the year, banks in the UK and most other countries have had a shortage of funds to lend to customers; this is referred to as the "Credit crunch". This shortage mainly caused by subprime losses incurred by US banks from the second half of last year to now. These losses meant that the risk associated with inter-bank lending doubled and financial institutions are no longer comfortable to lend each other funds. Basically, banks lent money to people who could not afford the repayments and now as a result the world is experiencing a lack of credit. This scarcity of funds has increased the cost of borrowing for banks even though the Bank of England(BOE) has lowered interest rates twice since the start and banks have now passed this cost on to you.
As a result of the "crunch" the majority of mortgage products have been withdrawn from the market and the products remaining are not as favourable as they were at the beginning of the year. An example; not too long ago it was possible to find mortgages with a loan to value (LTV) of up to 125%(Courtesy of Northern Rock). These have all been withdrawn and many lenders will now not exceed 90%LTV. Banks have also in general been increasing fees and costs associated with mortgaging in an attempt to up their profits and fill-up their balance sheets to improve their capital adequacy requirements.
If your mortgage term is expiring within the next few months, you will experience first hand the changes caused by this phenomenon, while remortgaging. The term, "being on your knees in front of the bank manager" has comeback to haunt us. Banks are putting forward any excuse not to approve a mortgage and the feeling is definitely that they are doing you a favour, by lending to you. Interest rates and fees have increased. A requirement for a lower loan to value is common and an increase in time to process the mortgage is now standard as banks try to ensure their lending policy is met to the last detail. First time buyers that would have qualified for a mortgage at the beginning of the year will now probably struggle to secure 80% of the same loan amount and will be met with higher costs. Annual mortgage approvals up to July this year were down 64% compared to the same period last year. This is the most significant lending slowdown since 1992.
Inevitably the "crunch" will be influencing the value of properties in the UK as it has removed a significant percentage of able buyers from the property market, effectively creating an inefficient market. In fact a fall in house prices has already started and you would have noticed frequent reports of lower property prices. The newest figures show; year on year property prices down somewhere between 6% and 8%.
Inflation: "When it rains it pours" Combined with the shortage of funds, we have also seen the emergence of inflation through-out the world, mainly caused by higher oil and resource prices. Higher inflation means we will be spending more of our hard earned income on day to day expenses and this combined with the higher cost involved in mortgaging is sure to cause significant slowing in the UK and World economies.
When do we expect things to get better?
The answer is simple: When some liquidity returns to the market and banks resume their standard lending practices you can expect things to slowly return to normal as many willing buyers are again able to secure funds and return to the property market. It will however take some time as considerable damage has already been done to the confidence in the housing and credit markets.
At this moment there are no signs of any improvements and you will see the situation get worse before it gets better.
We will be updating this report on a regular basis here on our website: www.psgconsult.co.uk ,so please visit this page regularly for a more updated response on the "credit crunch".
The opinions expressed are those of the author and are not held by PSG Consult unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.