Busbys Solicitors.
THE EFFECT OF THE CREDIT CRUNCH
What is the “credit crunch”?
07.05.08
It is important that we understand what the “credit crunch” is as that makes it simpler to think about what can be done to avoid the worst affects. The so called “credit crunch” started with problems in the housing market in the US and stems from mortgage lending to the “sub prime” market i.e. to people who would previously have been refused credit due to poor credit history or uncertain incomes. As lenders got a thirst for this type of business, so they relaxed their rules more and more, lending to people who would clearly be unable to meet the monthly commitment and, in many cases, secured on property of questionable value. As this all started to unravel, with increasing numbers of properties being repossessed, confidence in the banks started to waiver, with the result that many then found it difficult to raise funds in the money market with which to finance their lending.
So, what does it mean?
Well, in a nutshell, it means that banks and building societies are reigning in their lending. This in turn is leading to a shortage of credit and a tightening of lending terms, we are already seeing plenty of examples of this, with some lenders closing their mortgage book to new borrowers completely (First Direct) and some reserving their very best rates for those with the biggest deposits (Nationwide Building Society). Others have withdrawn their 100% mortgage range and many have restricted their maximum loan size. On the other hand, savers are in an enviable position. The banks are fighting hard to attract their business and are making investment rates look very good.
Mortgage approvals at a 13 year low
The continuing decline in activity in the UK property market has been underlined by the latest Bank of England figures on mortgage lending. The number of new mortgages approved for residential purchases, fell slightly in February to just 73,000 according to the Bank. This was a 39% drop on the same month a year ago and leaves prospective mortgage lending at its lowest level for 13 years. Housing equity withdrawal also slumped in the last quarter of 2007 to £7.3 billion.
Slowdown
The above figures illustrate the rapid contraction of mortgage lending due to high prices driving away first time buyers and the credit crunch, which has made it more
difficult for banks and building societies to raise the money needed to lend to customers. Borrowing for house purchases has gone through a sharp slowdown since last summer and the banks’ figures also show that remortgaging, which has been more buoyant recently, has also dipped. In February, the number of new loans approved for people who are staying put, but moving their mortgage deals to new lenders, fell to 111,000, from 118,000 in January.
The outlook is good
The likelihood is that the level of activity in the housing market will slip further over the coming months, as mortgage lenders either temporarily close their doors to new borrowers, or lift interest rates. That said, with a good credit rating coupled with the right income, there is no reason why, despite the credit crunch, you should not be able to obtain a satisfactory mortgage. For those that are wishing to sell, now is the time to be realistic with the marketing price, as those who are realistically priced stand a greater chance of achieving a sale than those which are not. So nothing really changes with the credit crunch, apart from those high risk borrowers, who will now find it increasingly difficult to find a reasonable mortgage product at a reasonable interest rate. Those who sell their properties for a fraction less, will hopefully buy a related property, likewise, for a fraction less. The wheels of the residential property market continue to turn, with everyone being a little more careful upon what they spend.
Moving your mortgage. Can remortgaging really save money?
It depends. It is estimated that more than half of all borrowers are continuing to pay over the odds for their mortgage each month. Usually these people are paying the lenders standard variable mortgage rate. There will be lower rates available from other providers, but this is not the whole story. In recent years, banks and building societies are reported to have been increasing mortgage fees to subsidise attractive headline interest rates. The so called mortgage arrangement fees have sky rocketed, as have charges for redeeming a mortgage. It is thus extremely important to ensure that ALL the small print is read to ensure that what you gain through switching a mortgage provider i.e. a lower rate of interest – is not lost through higher charges!
What help is available?
There are financial professionals who can advise as regards to the pros and cons of mortgage products. Some are employed by the lenders themselves and are therefore only able to recommend the specific products of the mortgage lender who employs them. The alternative is to choose an independent mortgage broker, who is not tied to any particular lender. They are thus more likely to be able to give an unbiased opinion on which mortgage product from which mortgage company will best suit your needs. They should also be able to explain to you the benefits of particular products and the pitfalls with others. Whilst the mortgage broker is likely to be paid a commission from whichever mortgage company you proceed with, they are likely to be paid by the mortgage company themselves and not you the borrower.
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If I want to consider remortgaging-where do I start?
The first step is to check the terms and conditions of your existing mortgage. These will tell you if you are tied in to your mortgage deal, or if there are any redemption penalties – sometimes phrased as early repayment charges. If you are locked in, you must decide if it is worth switching to a different rate, or stay put until the penalties have expired. You may have been with your existing lender for a long time and feel a sense of loyalty towards the company. However, most lenders do not reward loyalty with a reduction in interest rate! You should expect to shop around and look towards a different lender to get a better deal.
Which is the best deal for me?
You will face a choice of broadly four types of deals • • • • Fixed Capped Discounted Flexible
Fixed Rate Mortgages are ideal for people who want certainty and thus be able to work out how much they will be spending each month. The rate is usually fixed for between two and five years. Discounted Loans offer a reduction off the standard variable rate for a set period. If rates fall further, the rates that you will pay will also go down. However, when rates rise, so will your mortgage payments. A Capped Rate Loan will set a limit on the rate you will pay. If rates rise, your payments will not go above that level. However, if rates fall below the cap, so will your repayments. Flexible Mortgages allow you to overpay and underpay when you choose and without penalty. This is ideal for people who have fluctuating incomes, or who want to clear their mortgage early. An increasing number of Fixed, Capped and Discounted deals have more flexible features as well.
What should I avoid?
Avoid deals with extended redemption penalties. While these have been phased out in recent years, a number of lenders have reintroduced extended penalties to clamp down on so called “rate tarts” who move around frequently to get the best deal. Extended redemption penalties are often hidden in the small print of a mortgage contract and are sometimes called early repayment penalties or charges. Before you agree to a mortgage you should be presented with a “key facts” document. This should outline all the mortgage charges and small print in plain English – usually comprised within the mortgage offer itself. Also, read the “key facts” documents/ mortgage offer thoroughly and if you are unsure of any clauses, seek legal advice from solicitors advising you in connection with the remortgage/ purchase, or liaise with your mortgage broker.
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Here at Busbys we can give you all the help and advice you need. Contact me or David Helman on 01288 35 9000.
Ian Osborne Busbys Solicitors Bude & Holsworthy
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