Half Of Home Loans Are History
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I have grim news for homeowners and those looking to leap onto the property ladder. The worldwide credit crunch which began last summer has made banks very nervous and wary. Banks are no longer willing to lend to anyone with a pulse or anyone who can fill in a mortgage application, at least.
Lenders are going back to their roots by taking on borrowers who are sure to be a good risk. Therefore, the glory days of reckless lending and booming house prices are dead and buried!
How bad could it be?
For the record, there are around 11.8 million mortgages outstanding in the UK. Let's say that the credit crunch makes life difficult for just a quarter (25%) of mortgage borrowers. This means that around four million homeowners may find it tough to arrange a new mortgage when they decide to buy, move or remortgage. Ouch!
Alas, even after nine months of credit crises, there seems to be no end in sight. In fact, the problems in the mortgage market seem to be getting worse, not better. Here are a few brief reasons why homeowners should continue to be worried:
Thousands of deals have vanished
The number of mortgages on offer has plunged since last August. Seven months ago, borrowers could choose from nearly 13,000 different mortgages. Today, this figure has more than halved, with around 6,200 deals available. Thus, more than half of all home loans have vanished, so we're no longer spoilt for choice.
Rate cuts aren't working
The Bank of England cut its base rate by a quarter-point in December and February, reducing it to 5.25% a year. Alas, thanks to the credit crunch, this has had little or no effect on mortgage rates.
Indeed, for many people, effective mortgage costs are rising, not falling. This is because of a widening gap between the base rate and LIBOR, the London Interbank Offered Rate. For example, many tracker mortgages are linked to LIBOR, which is why they have become more expensive of late.
Competitive deals are swiftly pulled
With fewer home loans on offer, providers of Best Buy mortgages are being swamped with applications. Hence, some deals are being withdrawn at next to no notice. Earlier this month, some brokers were given just ten minutes' notice before Scottish Widows withdrew most of its mortgages.
Some lenders have pulled out completely
Some lenders (particularly specialist lenders) have closed down completely, because they cannot raise financing at reasonable rates. Others are restricting their lending to certain groups of individuals. For example, three small building societies last week announced that, due to a stampede of borrowers, they will lend only to local people for the time being.
Surveyors are being cautious, too
Last month, The Royal Institution of Chartered Surveyors reported the worst decline in house valuations since mid-1990.
Clearly, surveyors are worried about future house prices, leading many to reduce valuations. Some homeowners are finding it impossible to remortgage or move lender, because their property's value has come down since they last arranged a mortgage. Thus, reduced valuations are set to become another thorn in the housing market's side.
These risky deals have disappeared
As lenders rediscover the relationship between risk and reward, some borrowers are being left in the lurch. If you fall into one or more of the following categories, then it will be tough to get a mortgage without paying a high price:
1. No-deposit/100% mortgages: It used to be the case that homebuyers with no deposit had no trouble getting a 100% mortgage. These days, only two players remain: Abbey and Bank of Ireland. So, if you want to buy a home, you must first save up a deposit of 5% to 10% of the purchase price. For the very lowest rates, a deposit of 25% to 40% is required!
2. 'Negative equity' mortgages: In the boom times, lenders would lend you the entire purchase price of your property, plus an extra sum on top. No longer. Good riddance to bad rubbish!
3. Self-certification: These so-called ‘liar loans' have been used by desperate or unscrupulous buyers and brokers to get substandard borrowers onto the property ladder. By inflating their incomes, buyers were able to borrow much more than they should have. This market is almost as dead as a dodo, which could prove a problem for self-employed borrowers and those on irregular incomes.
4. High multiples of income: Before the crunch, borrowers could stretch themselves to the limit by borrowing six to seven times their income. In this new world, lenders are reluctant to lend more than five times income to even the very best borrowers.
5. Subprime mortgages: In the good old days, lenders queued up to lend to those borrowers with stains on their credit records. Now the subprime market is in meltdown, with rates soaring and lenders leaving in droves. Indeed, seven out of ten subprime mortgages no longer exist. What's more, even a single missed payment could see you turned away by mainstream lenders and cast adrift on the subprime seas!
6. Buy-to-let loans: The wheels are set to come off the buy-to-let bandwagon as lenders withdraw from this market, demand higher deposits, hike their interest rates, or charge much higher fees for these loans. For amateur landlords, getting a BTL mortgage is much harder, as lenders insist that rents must be 25% to 30% higher than mortgage payments. In today's overpriced housing market, this is a tough call.
Northern Rock RIP
In the first half of 2007, Northern Rock ruled supreme over the mortgage market, capturing almost a fifth (19%) of all new lending. Today, the building-society-turned-bank lies in ruins, having been nationalised in order to prevent its collapse. Indeed, as the Rock must shrink its bloated mortgage book, it now offers massively uncompetitive interest rates.
What's more, the UK's fifth-biggest mortgage lender is desperately trying to ditch its existing borrowers. As customers' special-rate mortgages come to an end, Rock is urging them to remortgage elsewhere. Several readers have shown these letters to me and asked for my advice. I say abandon the Rock if you can, or face a huge hike in your monthly repayments!
My final thoughts
For several years, I've warned that the twin bubbles in housing and lending put British borrowers at great risk. Now that the housing market is turning and the mortgage market is in meltdown, I get no pleasure from saying "I told you so".
The latest data from the US (the S&P/Case-Shiller index) shows that US home prices have dived more than a tenth (10.7%) in the past twelve months. Given that Britain's booms have been that much bigger, I fear for today's overstretched borrowers. Hence, I'd urge you to hope for the best, but prepare for the worst!
Lastly, if you need a new mortgage or have a special-rate deal which expires this year, then be sure to plan months ahead in order to avoid the worst of the mortgage massacre. By using a whole-of-market mortgage broker, such as our award-winning mortgage service, you can be sure of finding the best deals!
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