The global financial crisis – known colloquially as the "credit crunch" – has had a dramatic effect on the availability of mortgage loans and loans for the purchase of high value items, such as cars or holidays, in the United Kingdom over the past 18 months. Some of the largest lenders in the country have either collapsed or been acquired by other lenders. This has resulted in a scarcity of funds for prospective homeowners, despite cumulative cuts in the Bank Rate and unsecured loans becoming increasingly scarce and expensive as unemployment and fear of bad debt rises. If you already have a loan, and are able to keep up the repayments, the outlook for 2009 is good, but if you are seeking a loan, prospects remain as uncertain as they have been for many years.
Lending in 2009
Money on the wholesale market, which banks use to fund mortgage lending, remains relatively expensive despite decisions by the Monetary Policy Committee of the Bank of England to cut the Bank Rate by a total of 3% during October, November, and December 2008. This leaves it at just 2%, which is its lowest level for over 300 years. In turn, it has led to a dramatic reduction in the availability of mortgage loans with lenders imposing more stringent eligibility criteria and higher costs. Fewer people can obtain or borrow money to move house, so the number of houses sold has fallen, and housing prices fall, so the vicious circle continues.
In fact, the outlook for 2009 is that mortgage lending is expected to turn negative, as borrowers look to repay their existing housing debt, rather than borrow more. The latest figures from the CML ("Council of Mortgage Lenders") suggest that the number of housing transactions completed during 2009 will fall to just 700,000 – down 200,000 on 2008, and less than half the 1.6 million transactions completed in 2007 – resulting in negative net lending to the tune of £25 billion. Consumer demand, or rather the lack of it, together with continuing restrictions on credit and the need for financial institutions to balance the requirements of savers and borrowers, new and old, is likely to mean that the housing market remains hugely depressed during 2009 and that an extremely difficult year, financially, is in prospect.
Furthermore, the credit crunch has put paid to many online lenders, but this is not, necessarily, altogether bad news. It is true that there are now considerably fewer lenders to choose from than there were, say, 18 months ago. If you consider that the United Kingdom – and most of the developed world – has undergone the worst economic downturn since World War II, in the interim, it is testament to the administration, and financial backing, of these lenders that they still exist at all. While there are obviously no guarantees, as far as the future is concerned, borrowers choosing one of the online lenders that does remain at least knows that the company is robust, financially, and well-run.
There have also been one or two signs, recently, that activity in the housing market, in particular, may be recovering faster than predicted by the most pessimistic forecasts. The latest figures from RICS ("Royal Institution of Chartered"), for example, suggest that the number of enquiries from prospective buyers has reached a level last seen in late 2006. The conversion of enquiries into actual sales, however, depends on the availability of funding, although Government measures – such as the injection of £50 million into eight of the largest banks in the United Kingdom – may ease the situation slightly. The capital injection should reduce the three-month LIBOR ("London Inter Bank Offered Rate") – the rate at which lenders lend to each – but lending criteria are unlikely to be eased until at least the end of 2009. This means, in the short term, that the most competitive mortgage deals will still be available only to those borrowers who can raise a deposit of 25%, or have 25% equity in their existing homes. SVR ("Standard Rate Variable") mortgage deals have become much more attractive recently – fixed rate deals ate still expensive, and many new tracker deals impose a "collar" below which the interest rate charged cannot fall – not least, because the Bank of England is widely anticipated to make a further cut in the Bank Rate early in the New Year.