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Mortgages -
The Average Borrower In The Midst of Credit Crisis
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On Wednesday, 3rd of April 2008, borrowers in the UK, still irked by the sub-prime mortgage crisis that has denied many the chance of getting on the property ladder, woke up to another startling revelation. The Bank of England, in a credit condition survey, predicted that they faced tougher times ahead as banks and building societies further tighten up credit conditions.
While this may not come as a complete surprise, it further confirmed their fears that the end of credit crunch is no where near. In addition to the trauma that they faced in recent months, now lenders are clearly telling them they are not ready to take any more risks. Thus, more lenders have withdrawn a number of products or suspended lending. Some have gone as far as telling those with not so excellent credit histories not to come close, tactically.
Despite all this the worst is yet to happen, as the Bank of England also predicted that things would get rougher in the coming months with more withdrawal of credit facilities and further increase in prices.
Lenders, people must understand, are only doing all within their power to protect their interests. If the examples of Bear Stearns and Northern Rock are anything they could learn from, then there’s no better time to take warning than now. They, as such, forecast that the next three could see more mortgage defaults from customers.
In this game of save-your-head-first, borrowers are also learning to be more cautious, knowing too well that the hammer perpetually dangles over their head too. The Bank of England study showed that demand for house-purchase mortgages has not increased, yet there is a greater possibility it would even drop in the next three months. A further revelation is that remortgaging in now turning into a sort of vogue as people whose fixed-rate or discounted deals are ending try to seek ways to refinance their loans.
What may be quite troubling to every concerned observer like me is the manner in which banks and building societies are taking steps that suggest this monster, dubbed credit crunch, is proving invincible.
Just as the Bank of England survey was published last week, First Direct had suspended lending, the Co-Operative Bank had, in the same vein, withdrawn its two-year mortgage deals and the US investment bank, Lehman Brothers had brought lending at its two British mortgage businesses – South Pacific and Preferred- to a sudden halt. And at the weekend, the Independent reported that Halifax Bank, the biggest mortgage lender in Britain, was to raise interest rates for mortgage borrowers taking out larger home loans. It was, in addition, to shut it doors to every customer with deposit that is less than 5 per cent. More of the changes, or tightening, the bank is introducing include the reduction of its maximum loan-to-value (LTV) from 97 per cent to 95 per cent from early this week. Also, it will charge customers with LTVs of between 75 per cent and 95 per cent more on borrowing from the bank – interest rates on such mortgages will rise by an average of 0.14 per cent.
The whole intent, as these changes suggest, is to only deal with or target only those borrowers who are more prudent and of lower risk. To drive home this point, Halifax bank said it will also cut the rates charged customers with deposits of 25 per cent or more by an average of 0.1 per cent.
For those who are deemed to be riskier to do business with, perhaps, what is in the offing is further increase in rates, defaults and more and more repossessions. For this category of borrowers life in the next three months could be full of anxiety and expectations that things get better or even worse.
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