How the credit crunch continues to cause havoc

Over recent years many consumers in the UK have taken the easy access to credit for granted, and many didn’t realise that compared to some places consumers in the UK had things quite easy when it came to the availability of and accessibility to credit.

Finance such as loans, credit cards, store cards, mortgages, and other forms of finance have been pretty easy to gain access to – and this could be part of the reason why the UK has become known for its huge personal debt mountain.

Over the past few months, however, the UK’s financial markets have been thrown into turmoil and this is as the result of the global credit crunch that was sparked last year in the United States.

Within a relatively short period of time the financial markets have been turned upside down, and the availability of credit has gone from being pretty lax and easy to becoming extremely difficult to get.

The global credit crunch has affected both lenders and consumers in a number of ways, and many people may never have experienced credit conditions such as this before.

For lenders being able to get finance on the wholesale money markets has become increasingly difficult, with inter-bank lending charges going through the rood, and lenders fighting for scraps when it comes to wholesale finance.

The lack of availability of affordable lending means that lenders have had to severely restrict business, as they cannot get the money that they need to finance their lending operations.

All areas of the financial markets have been affected by this lack of funding. Credit card companies have recently reported that there has been a drop in the level of credit card approvals, reflecting the increased difficulties and the tighter lending conditions that are in place.

Many lenders have pushed up their unsecured lending rates, and have also taken some unsecured products off the market, whilst increasing stringency for applicants for their remaining unsecured loans.

The mortgage sector has taken a real hit as the result of the credit crunch, and this has left many consumers unable to get the funding that they need to get a property.

How the mortgage sector has been affected

One of the financial areas that has been most seriously affected by the global credit crunch is the mortgage sector. It all seemed to kick off last summer shortly after the onset of the credit crunch, which swept across the UK having been sparked in the sub-prime mortgage sector in the United Stated.

Shortly afterwards one of the leading mortgage providers in the UK, Northern Rock, fell into trouble forcing it to take an emergency loan from the Bank of England. This saw the bank become the first victim of a run on a British bank in nearly 150 years, and led to its eventual nationalisation.

Mortgage lenders, including banks and building societies, have now hit problems when it comes to mortgage lending. Banks are suffering real difficulties in getting the finance needed on the wholesale money markets to fund their mortgage lending, and this has resulted in interest rates on mortgages rising, despite two recent base rate cuts; tighter lending criteria, making it more difficult for many consumers to get finance; and the withdrawal of many products from the market, dramatically slashing the range of mortgage products now available.

The days of the 100% and 125% mortgage have effectively gone, and most lenders are now demanding a deposit of far higher than the traditional 5% in order to access competitive rates – those that cannot raise a substantial deposit risk being lumbered with a very high interest loan.

Building societies tend to fund their mortgages through savers’ deposit, and it was thought that they had escaped these problems. However, the fallout from banks that can no longer afford to take on business has resulted in building societies being inundated by applicants that have been refused by the banks, and this has resulted in many having to close the doors to new lending because they simply cannot keep up with demand.

Many have had to change their lending criteria in order to reduce the number of new applicants, and lenders all across the board are being far more careful about how much business they take on and who they will lend to.

One industry official recently commented on the chaos on the mortgage markets, stating: “Conditions in the mainstream mortgage market are now rapidly deteriorating at a frightening speed, with lenders changing their pricing and/or criteria at the fastest pace in living memory, and probably ever.”

Another added: ‘Banks and building societies are not surprisingly reviewing their lending criteria and overhauling their risk management programmes in the light of the current market and economic situation with the aim of reducing their exposure to bad debt.’