More news today as mortgage lenders continue to lower rates. Abbey this time announcing a reduction of 0.1% on certain Tracker products and Halifax announcing this week a reduction of up t 0.38% on one of their 2 year fixed offers. (Oh, and not in the news yet, Nationwide are going to follow suit on the 8th bringing their 2 and 5 year fixed rate offers below 6%)
So rates are creeping down and so they should!
To sum things up, Northern Rock was at one point lending MORE that 100% of the value of a property. This was fine at the time of rapid house price increases.
In America, where this had also been happening, consumers started to experience difficulty making payments on mortgages which were far in excess of their true affordability range.
Lenders were practically giving money away because house prices were climbing and they’d be able to realise their security and maybe even make a profit if things went tits up.
But when people did start to miss payments , all of a sudden the ‘risk’ was much closer to home.
Lenders then started to scrutinize themselves and look at ways of making their business appear less risky.
This is why we now see lenders saving their best rates for people with lower ‘loan-to-value’ mortgages in an attempt to deter ‘higher risk’ borrowers.
If you bought a house worth £150,000 and you owe above 75% of the value (£112,501 and upwards), if a property slump knocks of 30% of the value, you will owe more than the property is worth (negative equity). If you then decide to simply walk away, the lender would be left with a house that is worth less than they have outstanding on the debt.
So lenders want less risky business on their books at the moment to make themselves appear stable and worthy of continual funding.
Northern Rock had already over-exposed themselves and with way too much high risk business on it’s books, funding all but dried up (’til the Government stepped in but that’s another story).
So due to ‘risky business’ there has been a reduction in ‘faith’ and consequently less funding has been available in the UK mortgage market.
There has still been a demand for funding and when demand outstrips supply the price ALWAYS goes up.
Consequently rates shot up and consumers felt the pinch.
Now however, lenders have taken steps to reduce their exposure to risk and gradually more money is being made available which is starting to bring rates down again.