Figures released by the Bank of England and the Land Registry in the past week have confirmed what most of us already knew – the cost of credit is going up, and house price inflation and mortgage borrowing is down. In this article we look at how these latest trends affect you.
The impact of the sub-prime mortgage crisis in the US and the global credit crunch truly hit home this week as the Bank of England announced that mortgage lending is down 20% since this time last year.
In September, 102,000 mortgages were improved compared with 108,000 in August, and 127,000 in September 2006. This downward trend is likely to continue over the coming months as lenders set increasingly strict criteria for loans and the cost of credit goes up.
So what does this mean for you? This is bad news if you are a homeowner. Fewer mortgages mean less demand for houses, which inevitably leads to slowdown in house price inflation.
In fact, this has begun already. Last week the land registry confirmed that the annual inflation rate for house prices fell sharply from 9.4% in August to 8.7% in September. A continued slide over the next two months is expected to bring the overall inflation rate for residential properties to about 7% for the year.
Next year, however, house price inflation could dip as low as 1%. But there is no need to panic. A actual fall in house prices is seen as highly unlikely and if you have owned your house for more than a year or two, it has most likely already turned out to be an excellent investment already.
However, you could see your mortgage repayments rise further in the coming months as the cost of credit rises. If your mortgage is not fixed, now could be a good time to do so.
Another option would be to remortgage if you can find a better deal. Click here to read our recent feature on remortgaging. There are still good mortgage and remortgage deals out there, but the number of products on the market is becoming more limited.
“The Bank of England figures prove the mortgage industry is a shrinking market. The lack of growth is bad news for both the mortgage market and the economy as a whole,” says Louise Cuming, head of mortgages at moneysupermarket.com.
“The credit crunch has made lenders increasingly risk averse with many withdrawing higher risk products like sub-prime loans and high loan to value (LTV) products. We have also been in a rising interest rate environment and both these factors have dramatically constricted the market.”
If you are planning to buy a home, unfortunately you are unlikely to enjoy the house price rises that we have seen in recent years. That does not mean that buying home is not a good investment, but we do urge you to consider your options carefully.
While interest rates remain relatively low, they are going up. If you take out a mortgage make sure that you will be able to handle any increase in the cost of your monthly repayments. As we mentioned earlier, a fixed rate mortgage is probably the best idea at this time.
Also, if you are looking for a more specialised product like a self cert mortgage or a bad credit mortgage you may have difficulty finding a good home loan product.
“Consumer choice is being eroded as for some people there are few, if any, products available. Also, what is open to them will come with a significantly increased price tag. I fear we will start to see rising arrears and repossessions,” says Cuming.