Last summer’s credit crunch has spread its tentacles wider and deeper than anyone first imagined. The free and easy attitude to lending that banks and building societies had adopted in recent years ground urgently to a halt and, even into this month, lenders have continued to tighten criteria and back away from riskier deals.
Interest rates may be coming down but many commentators believe credit may never again be so readily available.
Those requiring heavy sub-prime loans are having most difficulty but it is not just the vulnerable facing problems. High earners and those with pristine credit histories are also having to stump up larger deposits, meet higher costs and jump through more hoops to get the loan they need.
“Lenders have tightened criteria across the board,” says Simon Tyler, managing director of Chase de Vere Mortgage Management. “Everyone is having to work harder to get the same deal.”
Melanie Bien, director at Savills Private Finance, the broker, says there has been an obvious flight to quality by lenders.
Apart from subprime borrowers, she feels the people who will struggle most to get a competitive mortgage deal are those at either end of the spectrum: the first-time buyer looking for a high loan-to-value (LTV) and those requiring mortgages of £1m-plus.
“Lenders are being more cautious at both ends, restricting maximum LTVs and charging higher rates of interest,” she says.
The best mortgage rates are now only available to those with deposits of 10 per cent or more, no matter how good their credit record or how high their salary.
Borrowers wanting self-certification mortgages are having to provide more detailed information about their income and are facing tougher credit checks.
A year ago, some 30 lenders were offering mortgages of at least 100 per cent of the value of the property. A number were regularly handing out up to 125 per cent.
This market has substantially dried up. Almost a third of lenders have withdrawn, and those left in the market are charging eye-popping interest rates.
Abbey, for example, this week said it would raise the interest rate on its 100 per cent LTV tracker mortgage by 1.15 percentage points, taking the initial rate to a 7.99 per cent. Most lenders have been pushing up rates by small increments of, say a quarter point, so this is a dramatic rise.
The hurdle for lenders is that the securitisation market – which allows them to package up debt and sell it on – has tightened considerably. This means it is still hard for lenders to raise funds even though their borrowing rates have fallen in recent weeks.
“Anything deemed remotely risky – such as high LTV business – is proving difficult to sell on, never mind subprime,” says Bien.
So lenders are offering fewer products, with higher rates and lower maximum loan-to-values. According to Moneyfacts.co.uk, Accord Mortgages, First National, Giraffe and igroup, as well as several smaller building societies – Manchester, Norwich and Peterborough, Portman, Yorkshire and Cheshire – have stopped offering 100 per cent or 100 per cent-plus mortgages in recent months.
These types of loans have helped thousands of first-time buyers on to the housing ladder over the past few years and it is hard to see how new buyers will afford a mortgage unless they have a decent cash deposit.
Moneyfacts.co.uk says buyers can still get a competitive rate at a 95 per cent LTV but says this may not be the case for much longer as many high street lenders are dropping their maximum LTVs to 90 per cent.
Tyler says first-time buyers can take some comfort, however, in house prices moving down, which will help offset the need for a larger deposit.
Lenders are also taking a tougher line with borrowers at the other end of the risk spectrum. Some have pulled away from offering “supersize” mortgages – of at least £1m – as fears grow about City bonuses and job security, and house prices.
Tyler says lenders are conducting more stringent underwriting on those wanting mortgages of £1m plus.
“Some are just not buying the house they would have been able to get a year ago,” he says.
Savills has seen an increase in the number of requests from high earners looking to extend their mortgages after they have been turned down by their lenders.
“Some lenders are not happy with the new higher loan-to-value of the mortgage on the property if the extra funding had been agreed,” says Bien. She says lenders are now reluctant to offer loan-to-values of more than 80 per cent for large mortgages, whereas early last year 85 per cent could have been achieved fairly easily.
Brokers say the people who will be least affected by the changes in lending criteria are likely to be those in the middle of the spectrum: those people who want fairly modest loans, who have a good deposit and a clean credit history.
But even this group is not off the hook. They are still likely to face higher interest rates than they might expect, given the current level of underlying borrowing costs. They will also have less choice.
Buy-to-let investors have seen the best deals dry up too. “Buy-to-let is more risky than residential lending because it is not the roof over the landlord’s head so there is more chance of default on the mortgage payments and lenders are starting to price for this risk more sensibly,” says Bien.
Buy-to-let rates are still competitive – the best two-year fixed rate is around 5.5 per cent – and another interest rate cut will boost rental yields, but arrangement fees have risen considerably. Many of the best rates have fees as high as 3 per cent of the mortgage. Fixed fees are also high – Abbey has a two-year fixed rate of 5.44 per cent with a £5,999 fee, for example.
Lenders have tightened rental criteria as well. Many had reduced rental requirements from 125 or 130 per cent of the mortgage to around 100 per cent before the credit crunch. But brokers say this is now moving in the other direction. Banks are also less willing to offer LTVs of 85 per cent or more.
Anyone wanting to go into buy-to-let who does not have a crystal clear credit rating may struggle. Moneyfacts says that between July and November almost 90 per cent of subprime buy-to-let loans were withdrawn.
“With the subprime buy-to-let market already virtually destroyed, it surely cannot sustain much more pressure before it vanishes,” says Julia Harris, an analyst at Moneyfacts.co.uk.
The subprime residential market has been hit equally hard. Around two-thirds of subprime mortgages have vanished, rates have been upped and criteria significantly tightened. Few lenders will now consider anyone classed as “heavy” subprime – those who have had numerous county court judgments or been declared bankrupt.
Borrowers with lighter blemishes – such as missed bill or loan repayments – are having to pay much higher rates. Those coming off a cheap subprime deal soon, or those who are struggling with other debt, could have trouble finding a new competitive mortgage.
“Just at the time that people need assistance, the products are no longer there,” says Tyler.
He fears there could be a large number of people who may not be able to remortgage or afford new higher rates, who will be left with no choice but to sell.
Mortgage brokers cannot see lenders’ attitudes softening soon. Even if interest rates come down another quarter or even half a point, they fear this may not be passed on in full.
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