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Credit crunch still causing turmoil for borrowers

Last summer saw the chaos that has become known as the global credit crunch spread across to the UK having been sparked in the sub-prime mortgage sector in the United States. Very few of us were aware of just what an impact the credit crunch would have on the financial markets, and many may have assumed that it was a short term thing that would soon pass. However, recent reports have shown that this is certainly not the case, and that the credit crunch could continue causing chaos in the financial markets for some time to come.

Recent reports have shown how the loan and mortgage markets have been hit hard by the effects of the credit crunch, and how consumers are continuing to suffer as a result of this impact. Despite two recent base rate cuts from the Bank of England, many lenders are still having to increase rates on both unsecured borrowing and on mortgages due to difficulties in getting affordable finance on the wholesale money markets in order to fund their lending.

Consumers that are looking for personal loans may end up paying a small fortune in additional interest due to rising interest rates. Those looking for mortgages could be hit with extortionate rates of interest unless they are able to put down a large deposit. First time buyers and those with damaged credit are likely to be the hardest hit when it comes to mortgages, and this is due to higher costs as well as reduced accessibility. Many lenders have reduced the number of sub-prime mortgages that they offer, with some even stopping lending to sub-prime customers altogether.

Mortgage companies have also hikes up the rates on many of their mortgage products, and although there are still some competitive deals on offer these are reserved for those that are willing – or able – to put down a larger deposit than the usual 5%. For first time buyers this is often impossible, as there is no equity from a previous property to rely on. However, in order to safeguard their own interests lenders are asking for deposits of up to 40% in some cases in order to access their most competitive deals – those unable to do this are left to choose from mortgages with far higher interest rates attached.

Many other lenders have had to take a variety of mortgage and loan products off the market altogether, or have had to restrict or stop new lending, at least for the shorter term. One industry official recently stated: "The latest withdrawals from the market have come in what appears to be a second phase of tightening. Lenders are facing up to the reality that things are not going to get better in the near future: in fact, it seems that there is more blood on the carpet yet to be spilt. Although growing numbers of borrowers are set to slip into sub-prime status, the market shows no signs of being able to satisfy this heightened demand."

Tom Smith
11th April 2008

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