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What the credit crunch means for mortgages 

Thousands of borrowers coming to the end of cheap two-year mortgage deals are being warned they could be frozen out of top new deals as the credit crisis worsens.

Brokers have warned that lenders are asking for bigger deposits for the best loans and subjecting customers to more stringent income checks as they become increasingly cautious about who they approve.  

Banks and building societies also raised tracker rates for new borrowers last week and economists warned the deals are unlikely to get cheaper even if the Bank of England chops interest rates. Therefore, people coming to the end of a deal should act fast to secure another top rate.

The mortgage and remortgage freeze comes as prices dropped 0.8 per cent in November, the largest monthly fall for 12 years, and annual growth fell from 9.7 per cent to 6.9 per cent.

The slowdown has started but the extent of the damage is still unknown. Most high street banks are predicting that prices will be flat next year, with falls possible in some areas. But some economists predict dips of about 10 per cent. 

A year ago, analysts guessed that we would have another 12 months of rises before the market turned and prices started to fall. A significant fall in house prices is now likely; the question is how big it will be.

Until now it had been assumed that a mortgage and remortgage freeze would only be a problem for borrowers with bad credit records or sub-prime. However, brokers say standard borrowers are also struggling, especially people with larger loans.

This is bad news for more than 300,000 people who took out rock-bottom fixed rates in the winter 2005 and are now coming to the end of their deals.

 They were already facing a payment shock because rates are much higher than two years ago, but the credit crunch means that they could now be turned down from the cheapest remortgage deals.

Anyone with a deposit of 20 per cent or less or borrowing five times income or more will find it more of a struggle. For some it might mean they have to jump through more hoops to secure a loan and others will find they have to stump up a bigger deposit or cut the amount they borrow to secure the best deal.

The Bank of England governor, Mervyn King, recently said the months ahead would be “uncomfortable” as tighter lending conditions in the wholesale markets, where banks and building societies borrow the money to lend to us, hit the housing market.

The Council of Mortgage Lenders also warned some lenders could run out of money in the New Year, if conditions did not improve.

The three-month Libor rate, the main rate at which UK banks lend to each other, jumped to 6.59 per cent earlier this month, its highest level since the Northern Rock crisis in September.

It has become a struggle for some borrowers to get a loan with less than a 20 per cent deposit especially in the £1million-plus market.

Borrowers are also being warned to allow extra time to apply for a new deal as lenders become more stringent. Brokers say that applications that would normally be completed in four weeks are taking double that.

Borrowers are being urged not to be deterred from searching out a new deal, though as interest rates are expected to be cut by a quarter point to 5.5 per cent by February.  However, discount and tracker loans could get more expensive for new customers.

The turmoil in the financial markets means it is getting harder to get a good mortgage deal, but it’s not impossible. There are still plenty of options available, the key is to have your own deposit and carefully asses what your finances may do, whether it be increase or decrease, over the term of the loan.

 

The author is Melinda Varley who an experienced journalist currently specializing in articles for the financial field. Melinda has held several positions for magazines and newspapers both hard copy and online and both in the UK and Australia which is where she originates from.

This article was written on the 20th December 2007.

This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase a term life policy at the time of purchase.

The views in this article represent those of the author and not those of Netbasic Limited.