Would-be homebuyers are facing their toughest challenge in decades as they try to secure mortgages amid continuing financial turmoil.
According to research commissioned by The Independent on Sunday from financial analyst firm Moneyfacts, there were 15,000 mortgage products last summer. Today there are 5,000 – 461 fixed- and variable-rate mortgages were withdrawn by lenders last week alone. This means nearly a 10th of all UK mortgage deals have vanished in the aftermath of the money market turmoil sparked by the crisis at US bank Bear Stearns.
Mortgage lenders are becoming much stricter about whom they lend to and how. Many are now demanding deposits of 25 per cent after years of lax lending at 125 per cent of the property's value. First-time buyers, those looking to move to a larger property or simply to remortgage are at greater risk of being rejected.
Several small building societies said they were turning away potential borrowers last week after panic in the financial markets, which saw an attempt to manipulate shares in HBOS, the UK's biggest mortgage lender. A "rogue" trader is alleged to have made £100m after he spread rumours on Wednesday morning that sent shares in the bank crashing by nearly 20 per cent.
The threat to stability was so serious that the Bank of England issued an unprecedented statement denying that HBOS, or any other bank, was in financial trouble. The Financial Services Authority, the City's watchdog, has launched its own criminal investigation into the alleged fraud. The Bank helped ease the nervousness later in the week after a meeting with the chief executives of the big clearing banks, including HBOS, when it promised to release another £5bn of emergency cash to the banks.
"What's happened in the UK, with so many mortgage deals being withdrawn, is unprecedented," said Melanie Bien from brokers Savills Private Finance.
It is not just small building societies that are struggling to raise cash on the international money markets. Big-name providers such as Bristol & West, Standard Life, Nationwide and the HBOS group have been withdrawing deals, substantially toughening their mortgage criteria or raising their rates. Experienced market watchers say that the industry is in crisis and will stay that way for the foreseeable future.
"It's not just the number of mortgage deals being pulled; it's lenders making it harder for people to borrow by insisting on a deposit of at least 10 per cent," said Ray Boulger, technical manager at mortgage broker Charcol. "It's like the clock has been turned back 10 or 15 years."
And in an echo of a bygone era, some building societies, including the Newbury, Melton Mowbray and Tipton, have said that from now on they will lend only to local people.
There was one bright spot for householders. MarketGuard, an insurance company, is to launch an insurance protection product that will cover mortgage repayment rises in a two-year contract. For a monthly premium, homeowners can hedge themselves against interest rate rises.
When the credit crunch first hit last autumn it was those with poor credit histories – so-called sub-prime customers – who were the main losers. But what was a problem for relatively few has now turned into a headache for many.
"The crunch has moved on to the mainstream," said Ms Bien. "Anyone with a small deposit will be affected, including first-time buyers and families looking to upsize."
Many of the estimated one million households whose low-rate two- or five-year fixed deals are coming to an end this year will be unable to remortgage and will have to stay with their current lender on the much higher standard variable rate.
Meanwhile, options close off to those already in difficulty. Frances Walker from the debt charity the Consumer Credit Counselling Service said: "We often advise people in arrears to remortgage to a better rate, but the broker we refer them to is telling us not to bother as there is no chance a lender will take them on."
And there seems to be no immediate relief in sight: "It will be a long time, if ever, before the mortgage market gets back to where it was before the credit crunch started," said Mr Boulger.
Anatomy of a financial meltdown: The slightly worried person's guide to the global economy
Worried? Confused? Who wouldn't be, with stock market panics, credit crunches and collateralised debt obligations not looking too clever? Here is our guide to the present mess and the people who got us into it:
Sub-prime: Loans given to people whose request would previously have been laughed out of the bank. But the business-hungry credit industry started to hand out money like confetti and sell these loans on to banks.
Collateralised Debt Obligations (CDOs): Fancy name for the sub-prime mortgages bundled up into "products", marketed as the next sure thing and sold to banks. They didn't really understand the full risks. Result: the implosion of Northern Rock.
Bear Stearns: US investment bank heavily into sub-prime mortgages. As it teetered on the edge of collapse, a sale was agreed to JPMorgan, backed by the US Federal Reserve.
Short-selling: Trader A believes company C's share price will fall. He agrees to sell to B its stock (which he doesn't yet have) at today's price on an agreed date in the future. The idea is the price will fall, A will buy at this lower rate and sell to B at the agreed higher price.
'Trash and crash': A variation of the above, whereby A ensures a fall in company C's share price, and thus his profits, by instigating rumours of trouble at C.
'Pump and dump': The reverse of the above, where shares are talked up, and sold at a higher price. Hey presto, they then fall.
Banks: Institutions where you leave your money so they can invest it, make huge profits and charge you for the privilege.
Credit crunch: Happening now – a sudden reluctance to lend as banks realise they've bought into too many dodgy risks. Home-hunters are finding that banks are suddenly no longer willing to offer a 100 per cent mortgage on a garden shed.
Housing market: Mechanism by which entire societies are convinced the only way to insure against trouble with their pensions is to own assets that will go on appreciating for ever.
Negative equity: When the asset you've borrowed for is worth less than the loan you took out. Oops.
Foreclosure: When a mortgage company calls in the loan ahead of its expiration date. In reality, two large men on your doorstep with a court order to put you on the street.
Buy-to-let: Get-rich-quick scheme by which people were told that if they borrowed money to purchase homes they could make vast profits renting to the property-less classes – ironically not the case.
Six-figure bonus: What the people responsible for all this mess will get, but the rest of us won't.
David RandallReuse content