An update on the effects of the credit crunch

The term ‘credit crunch’ has become an all too familiar one in the UK and globally over recent months. The crunch was sparked in the sub-prime mortgage sector in the United States, and was soon winging its was across the Atlantic to the UK, as well as to other worldwide destination.

The results of the crunch were widespread, and resulted in financial turmoil and a number of casualties. The credit crunch has adversely affected the money markets, financial sectors, businesses, and consumers.

There have been a number of notable casualties of the credit crunch, with Northern Rock going from the fifth largest mortgage lender in the nation to becoming the victim of the first run on a British bank in 150 years. This came after the lender was forced to take a multi-billion pound loan from the Bank of England, fuelling fears amongst customers that the bank was on the brink of collapse.

Over £2 billion was withdrawn from the bank by customers in the space of a few days, and share prices plummeted. The Rock is now in talks with regards to the sale of the business, with Sir Richard Branson’s company, Virgin, being one of the contenders, and there are also been talk of nationalisation of the company by the government if a successful buyer is not found.

The effects on businesses

The effect of the credit crunch on businesses is two-fold. Firstly, many businesses have struggled to get finance over recent months, which means that for many companies cash flow has become a real issue. The difficulty is likely to continue this year, with a number of lenders stating that they will have to limit or stop lending money to new business and commercial borrowers.

Recently the commercial division of Nationwide decided that it would be closing the doors to new borrowers and broker referrals, and would be concentrating on existing borrowers. One official from the bank stated: “I am using market conditions to be very selective about the type of lending we do.

There is an enormous appetite out there for borrowing, half of my competitors have disappeared and a lot of people are looking for finance.” He added: “We want meaningful relationships with customers and because of this we feel this is the time to stand by our existing customers rather than take on new customers.”

Paragon, a specialist buy to let lender that offers mortgages to potential landlords, has also announced that it will be cutting back on lending levels to new applicants, and will focus more on existing borrowers. The cut down on borrowing for new customers is due to come into force soon.

Another way in which businesses have suffered is in terms of sales, with the economy suffering a sharp slow down as the result of financial strains upon households. Less disposable income and fewer borrowing facilities for consumers means less money for them to spend, and this invariably has an impact on all sorts of businesses, and has recently hit retailers hard.

The effects on consumers

Consumers have had to face much tighter credit conditions over recent months, with lenders really tightening up when it comes to lending. This has made it difficult for some people to get finance, and this includes credit cards, store cards, loans, and mortgages.

The Bank of England recently confirmed lower mortgage lending levels for the last quarter of last year, and added that this was set to continue, with lenders stating that they are going to be cutting back on offering finance over the first quarter of this year, and may continue to cut back if the credit crunch continues to bite.

Consumers with bad credit could find it particularly difficult to get finance of any sort, with lenders in all financial sectors becoming increasingly cautious about lending to those with bad credit. However, those with very good credit, few debts, and homes with some level of equity may be fought over by lenders, who will now be vying for their custom in light of cutbacks to other borrowers who pose a higher risk.

First time buyers have been affected by the situation too. Although house prices are coming down and interest rates should be falling, which would have increased affordability for first time buyers, many lenders have now taken 100% mortgages off the market, which means that first time buyers have to stump up a hefty deposit to get a mortgage. In addition to this many lenders have also doubled the deposit that they required from 5% to 10%.