With recent turmoil in the mortgage market, Tony Harris of IFAs
FreelancerMoney looks at tightening lending criteria and how
freelancers may need to act quickly if they want to get onto the
housing ladder for the first time or are hoping to trade-up.
The practical impact of the credit crunch has been to reduce the amount
of money that is available for the banks to lend and the cost of the
available money has soared. According to Hector Sants, chief executive
of the Financial Services Authority, things will never be the same
again for the UK’s financial markets.
After a decade of increasingly liberal lending criteria, in a
competitive mortgage market that has allowed millions to purchase their
own home, it is now forecast that the credit crunch could permanently
change the way that mortgage finance is lent.
Credit will become less readily available as lenders across the board
tighten their criteria and we potentially return to a situation whereby
mortgage funding is, in effect, rationed.
Death of the 100% mortgage
Anecdotal evidence that this tightening of lending is already with us
can be seen with restrictions to the percentage of purchase price that
lenders will allow us to borrow. Until February this year many lenders
offered mortgage options which allowed borrowing of 100% of the
property value, with some even allowing up to 125% of the value.
With the cost of interbank funds now so high, lenders are desperately
keen to negotiate cheaper financing by showing that their new lending
is of low risk and one way to show this is to insist on higher deposits
from borrowers.
With funds scarce lenders have rapidly withdraw schemes and our options
as mortgage advisers for loans even at 95% of the purchase price have
become increasingly restricted.
The clamp down continues with many high street banks following their
peers. A few weeks ago Cheltenham and Gloucester was prepared in some
cases to lend up to 100% of the value of a property; but overnight they
reduced the maximum lending to 90%.
Buy now or wait?
These latest moves are a blow to buyers struggling to get on to the
property ladder. There was a high demand for nil or low deposit
mortgages among freelancers for all sorts of reasons and trying to find
the cash for a deposit is regularly cited as the toughest hurdle for
first time buyers. Clients are increasingly turning to relatives or
unsecured loans to help fund the deposits required.
Thankfully we do still have access to 95% mortgage schemes but there is
now some concern that in the months to come these schemes could well
become tougher to secure and so it may pay to buy now, particularly as
there may be bargains to be had in a quieter housing market. For some
freelancers a few months’ wait may mean that you then need a 10%
deposit which will put your plans back even further.
Similarly freelancers with relatively small amounts of equity in their
current homes, who’s existing mortgage scheme comes to an end in the
next 4-5 months, could well be better off looking at options now and
securing current deals ahead of any further tightening of lending
criteria.
First-timers’ pain - Landlords gain
One freelancer’s pain is another freelancer’s gain however, and a net
result of the fact that first time buyers are finding it tougher to get
onto the housing market is that our buy-to-let investors are reporting
ever increasing yields as demand for rental property increases.
Some are using this opportunity to add to build portfolios as an
eventual way to leave freelancing altogether and against a backdrop of
tightening criteria for most borrowers, paradoxically for buy to let
investors this is becoming easier to achieve.
In recent years, as interest rates increased, it was becoming harder to
show sufficient rental cover (the rental required in excess of mortgage
repayments to justify the lending) but these increases in rents have
enabled some landlords to purchase property that was out of their reach
previously. Others are using this improvement in rents to release funds
from existing properties to help fund further purchases.
What next for the mortgage market?
In high level discussions with mortgage companies it is becoming
increasingly clear to us that they have markedly less money to lend
this year compared to 2007. This will inevitably lead to further
tightening of criteria and increases in rates as the lenders actively
discourage borrowers from taking their products.
We are in the bizarre situation of seeing lenders trying to outdo each
other with the unattractiveness of their products rather than the norm
where they would be attempting to secure market share – all as a result
of physically not having the funding that allows them to lend.
How can you beat the crunch?
Borrowers will have to act quickly as schemes become available and we
are seeing short term deals that are launched and withdrawn in a matter
of a few days. Thankfully, unlike bank branch based staff many
independent mortgage advisers are able to react quickly on your behalf,
without lengthy meetings and masses of paperwork and can often secure
funds online or via the telephone before lenders pull the rates
Article kindly supplied by Tony Harris of FreelancerMoney .
Mar 12, 2008
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