Bail Out Plan

Credit Crunch

The ‘Credit Crunch’ has affected everybody in the UK from banks to individuals, read details and information on the origin of the credit crunch, its impacts, current solutions and lots more...

Get a Free Quote Impact of Credit Crunch Bail Out Plan on the UK Mortgage Market

Since August 2007, when the phrase ‘credit crunch’ first became current, many plans and proposals have been put forward to solve the problem. However, few commentators in August 2007 would have predicted a government bail out of the UK’s high street banks within just over a year.

New Bail Out Plan
On October 13th 2008, Alistair Darling, the Chancellor of the Exchequer, announced a £50 billion plan to bail out and part nationalise all of the UK’s major retail banks, with the exception of HSBC.

In return for government funding, Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) will issue new shares. In the case of HBOS, the government is attempting to facilitate its takeover by Lloyds TSB. The government is likely to end up with a 60 percent share in RBS and a 40 percent share in a combined Lloyds TSB – HBOS operation. Barclays is attempting to raise additional capital independently, but may be forced to accept government funding if private sector investment is not forthcoming.

Expected Effect on the UK Mortgage Market
Since the start of the credit crunch, UK mortgage lenders have been forced to restrict their lending, significantly. The money being offered in the proposed bail out of the major banks is designed to cover their losses resulting from exposure to the US sub-prime mortgage market. In addition to purely financial matters, this cash injection is designed to boost confidence and to encourage banks to lend to each other.

Even before the credit crunch occurred, many analysts considered that UK property prices had reached unsustainable heights and a price correction was overdue. So, even if mortgage availability improves, house prices are unlikely to rise in the short term and could even fall further as buyers hold out for bargains in a slow moving market. Central banks around the world are encouraging the lowering of interest rates to stave off a global recession and mortgage rates should reduce correspondingly when confidence in inter-bank lending returns.

Assuming that confidence returns to the mortgage market, availability of mortgages should increase gradually, with rates of interest continuing to decrease or, at worst, remaining steady. However, the bottom line is that potential borrowers with poor credit history are likely to have major difficulties in obtaining mortgage finance.

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