What the credit crunch means for uk mortgages

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You may have read about something called a credit crunch which is currently afflicting global currency markets. This phenomena involves a dulling of banks' appetite for risk, meaning that lending between them has dried up. Market players with cash are reluctant to part with it for more illiquid assets- apart from secure government bonds- causing something of a liquidity crisis. In a nutshell, there is not enough cash being invested to facilitate the amount of credit sloshing around the global economy for the past few years.

LIBOR, the rate which banks lend to each other, is now at 6.6%, where it has been since the onset of the US sub prime crisis two weeks ago. Traditionally, LIBOR rates are fractionally more than the bank base rate; now they nearly 1% above. Cash is in short supply, and those with it will only lend at higher rates of interest against very secure collateral

Nils Pratley, the excellent Guardian 'Viewpoint' columnist, makes several good points in today's paper regarding the credit situation in the money markets . Firstly, this sustained LIBOR rate represents a de facto rate interest rate rise of 0.5% in the past two weeks. This is something which although the Bank of England has had no control over, impacts on the 'real economy' of industry, corporate credit and mortgaging. This because the companies which lend to you and me- through fixed rate mortgages, credit cards and personal loans- raise their money on 3 month LIBOR.

The effects of this increase in the cost of borrowing and lack of available funds has already had a marked effect on mortgage lenders. This is especially apparent amongst lenders who are reliant on the money markets to raise funds. The effects range from the obvious, such as Infinity pulling it's entire mortgage range, to the more subtle.

Platform, who only days ago would go up to 95% loan to value on remortgages, will now only go up to 90%. Db (backed by Deutsche Bank) will now not accept self cert on their more heavy adverse range. This is because as markets have lost their appetite for risk, it is becoming harder and harder to sell risky sub prime mortgage books.

So what does this mean for you, the consumer?

1. Mortgage holders with LIBOR linked variable mortgages- usually people with bad credit who have sought loans 'off high street'- will receive a nasty shock on their mortgage payments next month. People close to the edge on their payments already, may just be pushed over.

2. It will be harder for people with poor credit, or those who have to self certify their income to get a loan if the lender raises it's money on the money markets rather than through depositors. Those who manage to get a loan will be paying a high price for it.

3. Good fixed rates are becoming very hard to come by.

4. Bank base rate will not be going any higher for the foreseeable future

The Mortgage Provider Online. Submitted with Article Distributor.