Lending Rules Will Tighten - But Abbey Ignores Warnings
The problems at Northern Rock in the past week will almost certainly result in the end of the six times salary mortgage. Financial experts say that mortgage interest rates are likely to climb higher, even though the Bank of England base rate is likely to have reached its peak in the current cycle, and may well come down in October, following the cut by the US Federal Reserve earlier this week. The link between the Bank of England base rate and mortgage rates has become less tangible as the credit crunch has caused banks to raise rates for other reasons.
The global squeeze on credit looks like spelling the end for cheap credit. Northern Rock employed aggressive tactics to increase its market share, and was now responsible for 20% of all new mortgages in the first half of the year. It has used mailing campaigns and enticing rates to lure borrowers, as well as spreading its net wider to get more people - some who are now struggling with repayments as rates have gone up.
The Northern Rock crisis will result in a less competitive market as lenders seek to get quality business, rather than simple increase their quantity. Less competition will mean an increase in mortgage rates. The people who will suffer most will be first-time buyers and those “at the margins”, as they will not be able to get credit at such cheap rates as before.
Leading banks will examine their own lending criteria after what has happened to Northern Rock. Whether rate go up or down, lenders need to look more responsibly at how they are lending money.
There are likely to be higher tracker rates (based on the high Libor rate), and fixed rate mortgages will not be as cheap, despite being based on the cheaper swap rate. Lenders will be looking to protect their own funds.
High-risk borrowers, such as those with a poor credit history or those without a regular income, are likely to be hit hardest. The most generous deals for this market have already disappeared. For normal borrowers there is still a huge range of mortgages.
The days of six times salary mortgages and 125% mortgages would appear to be over, yet, only on Wednesday this week Abbey launched a new 125% mortgage, and immediately came under fire. There are ten other lenders in the market which have deals at 100% or higher. The Abbey deal comes at a very strange time, given the Northern Rock situation. It is the biggest loan of its type ever offered to UK home buyers. Based entirely on the security of the property, it means that borrowers could lose their home for missing a payment, even it was on the part of the loan above the property’s value (the “25%” of the 125%). It could leave Abbey open to accusations that it has learnt nothing from the Northern Rock problems and calls for more responsible lending. Buyers with this mortgage would immediately be in a negative equity situation. Given the forecasts for a property value downturn, it seems a recipe for more problems in the future.
Published on September 30, 2007
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