How the mortgage market has changed since the credit crunch

The global credit crunch that made its way to the UK last summer has certainly made its mark in the financial world. The credit crunch has wreaked havoc in the financial markets, and has resulted in many fast, radical changes when it comes to borrowing and lending.

Whilst all financial industry sectors have been affected, including personal loans, credit cards, and other finance areas, one of the worse hit areas of finance has been the world of mortgages.

The mortgage meltdown, as it has become known, is in full swing in the UK, and both lenders and consumers are suffering, as is the housing market, which has slumped over recent months.

The root of the mortgage meltdown is that banks are now reluctant to lend to one another, and therefore mortgage providers are finding it more difficult and more expensive to get finance to fund their mortgage lending operations.

Officials have recognised the need to increase confidence amongst lenders, so that they will be encouraged to lend to one another again and get the mortgage market moving, and this is one of the major aims of the £50 billion mortgage aid plan that was recently announced by the government.

In the meantime the mortgage sector continues to suffer, and officials predict that the situation will get worse over the coming months before any improvement is seen, even with the government plan in action.

Over the past six months the mortgage market has been in turmoil, and has been affected in many ways. Some of the ways in which the credit crunch has impacted on mortgage includes:

• Tighter lending conditions: All lenders have dramatically tightened their lending conditions since the onset of the credit crunch. It is now far more difficult to get finance, with lenders being increasingly cautious with regards to who they will lend to and how much new business they will take on. Many lenders have put increased restrictions into place, and this is to cut down on lending because many cannot keep up with demand. Eligibility requirements have become far stricter, and many people may find it very difficult to get an affordable mortgage

• Hiked up rates: Since December of last year the base rate has fallen three times, going from 5.75% to 5%. However, despite these base rate cuts many lenders have put their mortgage interest rates up, which means that more and more consumers are left out in the cold with no hope of getting an affordable mortgage

• Increased deposit requirements: In the past the traditional deposit that many people put down was 5%, taking 95% of the property value as a mortgage loan. However, more and more lenders have now upped the ante by demanding higher deposits from borrowers in order to access their most competitive deals. Many lenders are now asking for 10% or more by way of a deposit, which has made things very difficult for first time buyers with no savings or previous property from which to take equity for a deposit.

• Withdrawal of products: Over the last year the number of mortgage products on the market has fallen by two thirds, leaving consumers with far less choice in an already difficult climate. What’s more lenders have withdrawn popular mortgages such as 125% and 100% mortgages from the shelves, which again has impacted heavily on the ability of the average first time buyer to get onto the property ladder.

• Increase in arrangement fees: Recent reports have shown that the average arrangement fee on a mortgage has rocketed over the past year, with fees on some mortgages going up by around 96%.

• Slump in mortgage lending approvals: A combination of lack of consumer confidence, tighter lending conditions, and high house prices has seen a slump in mortgage lending levels over recent months.

One official recently said: ‘The low level of mortgage activity is not only a consequence of slowing demand for houses due to the elevated affordability pressures facing potential house buyers, but also increasingly due to very tight credit conditions leading to markedly fewer and more expensive mortgages being available. Furthermore, potential house buyers are now having to provide higher deposit levels, which is a particularly major problem for first-time buyers.’

The changes to the mortgage markets have hit some groups harder than others, and amongst the hardest hit are those on low incomes, first time buyers, and those with damaged credit.

The tighter credit conditions have made it increasingly difficult for all of these groups to get affordable finance in the form of a mortgage.

Even the effects of the government rescue plan are set to take time, with the Council of Mortgage Lenders stating: ‘In the short term the trend of increasing prices and products being removed from the market is not going to be reversed. As and when the banks start lending to each other, the rate for lending will go down and that means that that will start to bring the price down but it is not going to be a dramatic reversal. It is going to be a slow process at best.’