How to beat the credit crunch

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 .


1st April 2008

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