House prices feel the heat

Not even the London market may be able to withstand the pressure as mortgage rates rise and lenders reject applicants with small deposits or poor credit histories. Julian Knight reports
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The Independent Online

A fall in house prices could be on the cards as a result of the credit crisis gripping the UK mortgage market.

The turmoil on the world money markets that prompted Northern Rock's SOS to the Bank of England on Thursday is already pushing up home loan repayment costs for thousands of Britons, squeezing family finances and shaking confidence in the housing market as a whole. A global credit shortage is making it more costly for banks to borrow off each other. This in turn makes it harder for banks to offer new loans and mortgages.

In the past few days, the Abbey and the Halifax have both raised rates on their tracker mortgages by between 0.1 and 0.2 per cent respectively. Standard Life has announced that it will be repricing its mortgage rates, and other mortgage lenders seem set to follow suit.

"There is a degree of repricing going on but as yet we are not finding it difficult to secure loans for borrowers," says Andrew Montlake, director of mortgage broker Cobalt Capital.

However, some lenders, it seems, are steering clear of "riskier" mortgage debt. On Thursday, Norwich & Peterborough building society reduced its mortgage loan-to-value limit from 95 per cent to 90 per cent.

"They reason they gave was that they wanted to avoid slightly riskier loans," says Melanie Bien, a director at mortgage broker Savills Private Finance.

First-time buyers looking for 95 per cent or 100 per cent mortgages may find it tougher than other buyers to get a loan – and if they do get one, it will be more expensive for them.

"Any tightening of lending criteria or higher rates is bound to hit first-time buyers hardest as they are the ones stretching themselves to get on the property ladder," says Ms Bien.

Worst affected could be those with poor credit histories looking for sub-prime loans. It was problems in the US sub-prime lending market that triggered the credit crisis in the first place.

"Two big players in this area – GMAC and edeus – have raised their mortgage rates by 1 per cent. In addition, we are seeing sub-prime lenders being stricter over lending criteria – for example, asking that people have a bigger deposit to put down before making the loan," says Mr Montlake.

As for the effects of the credit turmoil on the UK housing market, Ed Stansfield, economist at Capital Economics, says it is only bad news: "A slide in UK house prices is more likely than it was before the events of the past few weeks. The turmoil in the financial markets is likely to hurt the London housing market. The capital was widely predicted to be the driver of any house price growth in 2008. The forecasts for 2008 may have to be downgraded."

Ray Boulger, technical director at mortgage broker John Charcol, agrees that the outlook for house prices has worsened. "Property transactions will fall over the next few months and it is likely that house prices in some areas may also fall."

In recent days, both the Royal Institution of Chartered Surveyors and the property website have reported that house prices are beginning to fall in the UK.

Will the Northern Rock bail-out affect you?

Why has Northern Rock asked the Bank of England for a loan?

Put simply, the bank has temporary cashflow problems and needs the loan so that it can continue its day-to-day business.

Unlike rivals such as Halifax and HSBC, Northern Rock does not have a huge reserve of savers' cash washing about, and therefore has to raise money through the money markets. It does this by selling its mortgage and loan debt on to other banks.

This market in debt is in turmoil and, as a result, Northern Rock has found that its funds have dried up.

I have savings with Northern Rock. What will happen to my money?

Northern Rock and the British Bankers' Association say your money is safe where it is, and there is no reason, at this stage, not to believe them. Any mass exodus by Northern Rock savers would only make a bad situation worse because it would drain the bank of resources at a time when it is temporarily short of cash.

I have taken out a loan with Northern Rock. Does this mean my repayments will be suspended?

No, sadly, you won't be able to escape your commitment to repay your loan or mortgage all because Northern Rock is in difficulties. If you make repayments by direct debit, then they will leave your account as usual. If you have to send a cheque by a certain date, make sure you do or you run the risk of incurring a penalty fee.

I am not a Northern Rock customer but could its problems hurt my finances?

Not directly. But if you're shopping around for a new mortgage, the turmoil that has hit Northern Rock may harm your quest. Mortgages could become more expensive in coming months if the credit crunch continues.

Are other banks likely to go the same way?

It mostly depends on whether the credit crisis continues. The Chancellor, Alistair Darling, says that no other banks are currently discussing a similar bail-out with the Bank of England. However, the credit crisis is hitting all the banks – even those with large savings deposits. There is every chance that another bank may ask for a loan sometime soon.