How to Best Deal with the Mortgage Credit Crisis in the UK
Have you ever experienced a crisis? Perhaps your computer at the office crashed a few minutes before you were able to print out a vital business proposal. Possibly your car broke down in the middle of nowhere, on the way to a wedding or graduation. Maybe your favorite coffee shop just ran out of its white chocolate macadamia nut flavored brew.
There is an old belief that love and money influence everything in life. Indeed, a financial crisis, whether affecting us as individuals or as a nation, can be devastating. However, our best approach to dealing with a financial crisis is not to worry; but rather, to take action. Sometimes we cannot completely solve a crisis per se. However, we can find ways to weather the storm until we can enjoy smooth financial sailing again.
The latest news is not good news
Recently, the mortgage credit crisis in the UK has worsened. During the past year, the number of major UK mortgage lenders has plummeted from 100 to just 30. Furthermore, the new mortgage approval rate has slid 40%.
Here are some signs of the crisis. Several high street banks have withdrawn their mortgage products from the market. Other huge mortgage lenders are withdrawing their "best buy" mortgage deals from the market. Still other huge players in the industry are requiring borrowers with smaller deposits to pay extremely high rates.
The party is over
What went wrong? In short, the economic boom of the past few years is over. Lenders are no longer able to borrow and lend money at rock-bottom rates. The result is that mortgage lenders will lend to borrowers with larger deposits. To review, the mortgage deposit is equal to the difference between your new home’s price, and the mortgage that you have taken out. Typically, this is roughly 10% of the purchase price.
Furthermore, expect mortgage lenders to do business with borrowers who have lower multiples of yearly salaries. They oftentimes use complex credit rating systems to determine how much they will lend to various classes of borrowers. During the recent boom, mortgage lenders often provided borrowers with values of 3-5 times their annual salaries!
Those who are potential first time homebuyers
How the credit crisis happened is less clear than the motives of the mortgages lenders’ withdrawing of mortgage products. Nevertheless, this action affects new potential homebuyers. If you were contemplating the purchase of a new home, but have not bought one yet, fortune is on your side.
Currently, property prices have been dropping for six months, and it seems that they will continue to drop. This seems logical, as the International Monetary Fund (IMF) has stated that the residential property industry has overvalued UK homes by 30%.
Those who are recent first time homebuyers
So, what should recent first-time homebuyers do? If you have secured a mortgage at a fixed rate, you are good shape. If you are fortunate, your next rate will be roughly just as low. In fact, the likelihood of that situation occurring is good. Regardless of how bad the general economic situation becomes, it is likely that interest rates will remain extremely low.
However, as the contrast of the pessimists vs optimist views on the financial crisis indicates, no crystal ball can predict the future with 100% accuracy. Certain figures about mortgages taken out during the past few years indicate how volatile the industry can be. For instance, lenders classified 20% of mortgages doled out during the past few years as "high risk" for the following reasons:
· They were for over 100% of the price of the property
· They were for over 4.5 times the borrower’s annual income
What options do you have if you are struggling to make your mortgage payments? Many people are using sources such as overdrafts and credit cards to pay the difference. You should choose these options with caution, as they could become a quick-fix solution that could cause more problems for the health of your credit.
Those with remortgages
Meanwhile, in the case that you have remortgaged your house, the amount of equity on your home will greatly dictate your particular status in the mortgage crisis. If you have good equity and have been making mortgage repayments for long time, you should not be in a crisis mode. Using a solid independent mortgage broker will help to find a mortgage lender who is prepared to do business.
Those ending short-term fixed rate deals
A discussion on how the crisis is affecting specific groups is not complete without addressing this particular group. Your mortgage payments will probably rise in the case that you have secured a solid fixed rate deal for roughly two years, and this is the first time that you have remortgaged. Nevertheless, the good news is that you will pay less than borrowers who had secured a mortgage at a standard variable rate.
Those who are selling to buy
Fortunately, a silver lining exists in the cloud of the mortgage crisis, for this group. A decrease in the value of the home you will purchase will parallel a decrease in the price of the property you are selling. Thus, if you are buying a less costly property, you should act as soon as possible. On the other hand, if you will be purchasing a costlier property, then it would prudent to see if the housing market will change.
Those who are self-employed
During the past 1-1.5 decades, mortgage lenders have become more receptive about providing mortgages to the self-employed. While the current trend is reverting to a more traditional approach, you will simply have to do more legwork to find a solid lender who will provide mortgages to the self-employed.
Those with bad credit history
Unfortunately, due to factors such as the US sub prime mortgage crisis, UK lenders have become more conservative in their doling out of mortgages. Thus, those with bad credit histories will find it increasingly more difficult to secure a mortgage. Mortgage lenders are returning to their former practices of lending to those with higher salaries, impeccable credit, etc.
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