Credit crunch bites the UK mortgage market

June 7th 2008

What is happening?

The UK mortgage market is operating in a way that we have never seen before and is certainly very different to the one we have become used to over recent years. From a position of oversupply this time last year, with intense competition amongst lenders fighting for your custom, we have now moved to a state of under supply, with tightening criteria, higher rates and higher fees to pay.

Why is this happening?

Firstly, a lack of liquidity in the money markets – this is the money that banks lend to each other. Previously the banks would have used deposits – money in savings accounts to fund their mortgages. In more recent years mortgage lending has been funded by the money markets or from the sale of mortgage backed securities.  Mortgage lenders are now struggling to sell their mortgage backed securities, due to this lack of liquidity. This has been mostly evident in the US sub prime market, where banks have had to write off huge losses and change the way they manage their businesses. The banks are now in a scramble to ensure less of their loans are funded by the money markets and more of them are funded by deposits. In short, there is not much cash around to fund new mortgage lending.

The second problem is confidence. Lenders fear that the market will slow down and house prices will begin to fall. This has had the strongest impact on the first time buyer market as 125% loans were firstly withdrawn, and more recently 100% loans have now been removed. No lender wants to be the last one in the market with weak criteria as this could prove costly for them due to a potential influx of riskier applications.

When a lender does have a leading product, they are generally the only lender offering this deal and everyone wants to jump on board. This means that the lender has more demand than it can deal with and has to either close its doors, as we saw with First Direct last month, or price their products higher making them less attractive and easing demand, allowing them to process the current work load.

What should you do?

If you are approaching the end of your current deal at some point during the next six months, then now is the time to act.

Firstly, ensure you seek professional advice. In the current market it has never been more important to seek whole of market advice. Products and criteria are changing on a daily basis and there are a number of different aspects that should be reviewed when choosing a new mortgage product. With so many of us using the internet for shopping, banking or even to make dinner reservations, many people are now considering arranging their own mortgage online. There are potential pitfalls with this – internet search engines do not always take specific criteria into account, they may not consider fees or how interest is calculated and may not therefore provide the true overall cost of the mortgage.  It is also difficult for the websites to keep up to date with changing products and criteria due to the speed at which the changes are occurring at the present time.

Secondly, keep your expectations realistic. If you are coming to the end of a 2 year fixed rate at 4.29% you must be realistic and understand that your mortgage repayments are going to rise. If this is going to cause you a problem it is vital that you seek professional advice and find out what your options are. The last thing you should do is bury your head in the sand – as the sooner you seek advice, the greater the options available to you.

When the time comes to consider your mortgage options and you would like professional advice you can contact Lee Naylor at Prosperis on 0113 2878235 or 07812 159965 and I would be happy to discuss your options with you.