By Julian Knight
Be careful what you wish for. When Chancellor Darling mused in the aftermath of Northern Rock that he would like a return to old fashioned banking values he was derided by many. Well, now, as the credit crunch is getting worse rather than better it seems that it really is back to the future for the UK mortgage market.
To say mortgage lenders are twitchy following Bear Stearns and the recent turmoil is an understatement. Mortgage deals are being withdrawn right, left and centre as the credit market gums up. Some lenders are only giving brokers half an hour notice that deals are to be withdrawn. What’s happening is that mortgage firms are trying to rollback years of loose lending practices in double-quick time.
"It's like the clocks have been turned back 15 years. Lenders are being very cautious at present; there are far fewer mortgage deals on the table. It's a real challenge for brokers to get a deal for a client," Andrew Montlake from mortgage broker Cobalt Capital told me on Wednesday.
What it means is that lots of people, who only a few months ago
could have expected to get a mortgage, will be turned down flat because
they don't meet the lenders higher criteria for what they define as a
“quality” borrower.
I don’t think this is a short-term change. The days of easy mortgages are over, possibly for years to come. Borrowers are going to need to have larger deposits, good steady jobs and a clean credit record in order to bag a mortgage. What’s more, they'll be allowed to borrow far less money than in the recent past. It's goodbye – thankfully – to the days of the five-times salary mortgage. Those who don’t meet the lenders new tougher criteria will have to stay with their current lender or, if they are a first time buyer, forget it until they are in a better position.
What does this mean for the UK's already slowing housing market? For
starters it will undoubtedly restrict the supply of buyers clambering
on to the housing ladder - and in any market if the number of buyers
fall so does price. This will lead to house prices declining more
sharply than virtually anyone was predicting pre-crunch.
Basically a lot of housing market growth from 2004 was built on a
loosening of lending criteria. I’m not going to guess at a percentage
figure for price falls but some of the industry bodies predictions of
zero growth this year picking up in 2009 are seriously over optimistic.
Anyone sitting on a 95 or 90 per cent mortgage may find themselves in
negative equity before too long.
Interest rates are falling and have some way to fall yet, which in
the normal course of events should help. But how much of this is going
to be passed on through mortgages is anyone's guess.
The return to old fashioned banking values could be very painful, particularly for those looking to sell their homes.
The UK mortgage market re churns itself on 2 year deals unlike any other market in the world, now the money supply tap has been turned off many borrowers will be unable to re mortgage based on new lending policies.
The only option for these borrowers will be to remain on high standard variable / retention rates leading to arrears and more doom for the market.
Posted by: Peter | Wednesday, 19 March 2008 at 07:57 PM