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...
Initial Effects of the Credit Crunch on the UK Mortgage Market
The mortgage market in the UK, as in other countries, has been seriously affected by the credit crunch resulting from the demise of the US sub-prime mortgage market.
Between 1996 and 2006, in a period of relatively low interest rates, the average house price in the UK almost trebled. Even before the credit crunch, many commentators were in agreement that further house price growth at this rate was unsustainable, largely because first time buyers were being priced out of the market.
Demutualisation of Building Societies
During this period, an increasing number of building societies demutualised. Some of the UK’s largest building societies, including the Halifax, Alliance & Leicester and Northern Rock became banks, in the late 1990s. Many of these demutualised building societies moved away from their traditional business model of funding mortgages from deposits made by building society savers. Instead, these banks became increasingly dependent on the wholesale money market to fund their mortgage lending.
In an attempt to increase its share of the mortgage market and to attract first time buyers, Northern Rock offered mortgages of up to 125 percent loan to value (LTV) at multiples of six times salary, funded from the wholesale money market. In comparison, traditional lenders offered a maximum of up to 90 percent LTV at multiples of three times salary.
Inter-Bank Lending Slowdown
When the effects of the credit crunch started to be felt, those financial institutions such as Northern Rock and Bradford & Bingley, which were largely dependent on the wholesale money market, found it increasingly difficult to fund their existing mortgage commitments and to provide mortgage finance for new borrowers. As their position deteriorated, other banks declined to lend to these institutions, with the result that government intervention was required in order to protect depositors and borrowers.
Current UK Mortgage Market
In spite of continuing problems resulting from the credit crunch and the associated slowdown and stagnation in the UK property market, coupled with some lurid reporting of these issues in the media, the UK mortgage market has not collapsed.
Traditional building societies such as the Nationwide and banks such as HSBC, with relatively little exposure to the US sub-prime mortgage market, are still offering mortgage finance.
However, lending criteria have been tightened and some types of mortgage (e.g. 100 percent mortgages, buy to let mortgages) are very difficult to obtain. Mergers are taking place in both the bank and building society sectors, which should improve overall confidence in the mortgage market. Increased intervention from governments and central banks should increase liquidity in the money market and boost confidence, although uncertainty remains.