Tuesday, 29 July 2008

Mortgage lending log jam?

There is way too much garbage in the media at the moment about mortgage lending freezing up or a mortgage lending log jam.

there is plenty of mortgage money out there for the lenders to lend. Another short history again below.

10 years ago a borrower needed at least a 5% deposit, proof of their income and proof of repayment method. The borrowing limit was 2.5 times joint income. A 2 year fixed rate was 6.5% with a booking fee of £299

Today a borrower needs a 10% deposit, proof of their income and proof of repayment method. The borrowing allowed is 4.25 joint income. A 2 year fixed rate is 6.2% with a fee of £599.

So over the 10 years a larger deposit is now needed, although you can still borrow more historically and at a lower rate than 10 years ago.

So why the fuss?

Because under Gordon Brown's watch the lenders changed their lending criteria to a much more loose lending policy. Between 2000 and August 2007 a borrower needed no deposit, no proof of their income, no proof of their repayment method, 6 times joint income on a 2 year fixed rate of 4% with a £149 booking fee.

This had the effect of pushing up house prices to way above their fair value. Now lenders have stopped their loose lending, a massive number of borrowers do not fit the criteria for lending, either because the lenders will not lend them enough, they cannot prove their income or they do not have a deposit.

House prices will now fall no matter what is done.


Monocle said...

Well, with a 10% deposit and even 4 times salary as restrictions the maths are very clear: an average earner on £25,000 would only be able to afford a £110K house/flat, for which he/she would need to save around £12,000 including fees and deposit. The average house price is still £170K and the average folk of my age have rarely been able to save beyond £5K. Hardly a liquidity problem then, let house prices fall to realistic levels and encourage saving instead of borrowing and we'll have a normal mortgage market again.

CROWN said...

monocle - spot on. When the house prices fall to the level where the potential borrowers sit, the market will kick into life.

mattyb245 said...

The housing market is obviously suffering at the moment, as a report today identified that house prices had fallen by a massive 10.5% in the past 12 months, which is ridiculous. Mortgage companies should be doing more to help people and stop them resorting to using companies that let you sell and rent back your home, as many are doing and this doesn't help the market.

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Forrest Cutler said...

I see this post is a little dated, however months later, in the US at least, we are still seeing fairly easy credit criteria being needed to get the best mortgage rates.

Yes, subprime is gone and prices are falling, but don't believe all that your hear. There are still great loans and the UK seems look the same.

Rent Back Schemes said...

The BBC reports that some credit companies are going out of their way to help borrowers with their debt problems. This has almost been unheard of until now. The credit crunch has forced lenders of all types to work alongside their borrowers to maximize the amount of repayments achieved.