Borrowers have been warned that high-street banks and building societies are
likely to crack down on lending in the wake of the Northern Rock crisis.
Millions of consumers are already finding it tough to get such good deals on
mortgages and credit cards as firms tighten their belts.
Northern Rock had to be bailed out by the Bank of England when it could no
longer get mortgage funding from the wholesale money markets, where rates
had shot up to unprecedented levels.
The credit crunch has since eased slightly, with rates dropping back last
week, but analysts said banks and building societies would still be
reluctant to take such big risks in future - meaning higher rates or less
favourable terms for borrowers.
Katie Tucker at broker John Charcol said: “The good times are definitely over
for borrowers. Rates have been at rock-bottom for years but Northern Rock
was a wake-up call. Lenders realise they can’t take such big risks.”
Here, we look at the impact of the credit crackdown on different types of
borrower.
Bigger borrowers
High-flyers who rely on bonuses to buy £1m-plus homes have been warned lenders
are likely to take a tough approach this year.
Melanie Bien at Savills Private Finance, a broker, said: “If a client had a
track record showing that for the past two or three years they had received
roughly the same bonus, banks such as Barclays, Clydesdale, Lloyds TSB and
Bank of Scotland would take it into account when calculating how much they
could borrow.”
But if bonuses are significantly lower this year, as expected, lenders may
rethink their policy.
Jonathan Cornell at Hamptons Mortgages, a broker, said: “Underwriters have
told me they will be less forgiving to investment bankers looking to borrow
large multiples of their income, so some people may struggle to borrow the
amount they need for that west London townhouse.
“If you have had a £500,000 bonus for the past two or three years, but it
drops to £400,000, lenders are going to be worried it will drop again and
may take less of your bonus into account.”
The self-employed
Standard mortgages require borrowers to prove their income by supplying
payslips, or three years of accounts. The self-employed and contract workers
often have trouble verifying earnings, though, which is where
self-certification mortgages come in: they do not require applicants to
prove their income.
However, the self-cert market has faced criticism as some brokers have
encouraged borrowers to lie about earnings and inflate the amount they can
borrow.
Several providers have therefore tightened their criteria. Platform, the
specialist lender owned by Britannia building society, has increased the
rates on some of its self-cert products by more than 0.5 percentage points
recently. And GMAC has slashed the maximum amount it will lend on self-cert
products from 90% to 75%.
DB Mortgages, owned by Deutsche Bank, announced last week it was cutting its
maximum loan to 75% of a property’s value – even for existing applicants.
Rob Clifford at Mortgageforce, a broker, said: “If a lender changes its
criteria between giving you an agreement in principle and a formal offer, it
will normally honour the loan advance. However, DB Mortgages has said that
it will not do so – some people may find it will no longer lend to them.”
There are still plenty of lenders who will lend above 75% on self-cert loans,
however, including Bristol & West and Birmingham Midshires.
Card borrowers
Barclaycard started reviewing its customers’ credit limits at the beginning of
last year and it has reduced the amount available to about 500,000
customers. It is also offering lower limits to some new customers –
particularly those who have never had a credit card before.
HSBC and NatWest have also cut the credit available to some people. HSBC said:
“We are focusing more on existing customers, particularly those who do not
use their credit cards, or only use a small proportion of the available
credit.”
Millions of people who have multiple credit cards that they no longer use,
perhaps because they took out a card for a 0% introductory offer that has
since expired, could find they struggle to get new credit in future. Even if
you have no debt on the card, lenders will see you have the potential to
borrow a certain amount and may turn you down.
Robert Kenley at Moneysuper-market, a comparison site, said: “If you have
cards you don’t use, cancel them or you may find you are not offered the
credit limit you expected when you apply for a new card. You may even have
your application declined.”
Buy-to-letters
Most variable-rate mortgages are linked to Bank rate, so borrowers’ payments
change only if the Bank moves its official interest rate. However, a
significant number of buy-to-let loans are linked to the three-month Libor
rate. This is the rate at which banks lend to each other in the wholesale
markets and is currently 6.30% – 0.59 percentage points above Bank rate.
Many landlords thus face big hikes in monthly payments, even though Bank
rate has not changed since July.
Mortgage Trust recently increased the rate on its Libor-linked deals by 0.92
points, from 5.82% to 6.74%, adding £115 a month to the cost of a £150,000
interest-only mortgage.
If you don’t face penalties, remortgage. Most advisers suggest fixes to reduce
the risk your repayments will rise above your rental income. The best
two-year fix, from Alliance & Leicester, is at 6.19% with a £999 fee.
First-time buyers
Parents may find they have to dig deeper to help children onto the housing
ladder as several lenders have pulled deals specifically aimed at first-time
buyers.
Norwich & Peterborough building society has stopped offering mortgages to
those with no deposit. The maximum it will lend is 90% of a property’s
value. Accord, owned by Yorkshire building society, has also withdrawn its
100% deals. Yorkshire itself will still lend up to 100%, though it will no
longer go to 115%. Leeds building society will now offer 100% loans only if
a parent acts as guarantor.
Despite this tightening, some lenders continue to offer products that do not
require a deposit. They include Abbey, Scottish Widows Bank, Mortgage
Express, Alliance & Leicester and Northern Rock.
David Hollingworth at L&C Mortgages, a broker, said: “There is still
choice for those with no deposit, but lenders are becoming more cautious.”
If you can scrape together a 10% deposit, you can fix for two years at 5.49%
with Britannia – this deal is available up to 95%, though a higher lending
charge is levied if your deposit is less than 10%. The fee is £999.
Remortgagers
Nearly 1m people will come off cheap fixed-rate deals in the next few months
and they face a big payment shock.
Alliance & Leicester, Halifax, Bank of Scotland and Abbey have all
increased their tracker rates for new borrowers in the past couple of weeks
because of higher funding costs in the wholesale markets.
Once you have locked into a tracker, however, your rate will move in line with
Bank rate, not the wholesale markets – and many analysts think the Bank’s
next move will be down.
Despite having increased its variable-rate deals, Halifax still has the best
two-year tracker for remortgages at 0.16 percentage points below Bank rate.
The current pay rate is 5.59%. It is only available through brokers; there
is a £1,499 arrangement fee but no valuation or legal costs.
If you would prefer long-term value, Woolwich and Cheltenham & Gloucester
have lifetime trackers at 0.17 points above Bank rate – currently 5.92%.
Both are available for loans up to 60%, although C&G’s is via brokers
only.
THE SELF-EMPLOYED WORKER
Friends Naomi Santall and Manni Nutakor, both 36, have already been hit by the
credit crunch as Santall is a self-employed fraud officer with less than
three years of accounts.
They are buying a three-bedroom terrace house in South Norwood, southeast
London, but had to go for a self-cert deal because of Santall’s employment
status.
They applied for a two-year fix from Platform at 6.69% last month, but
Platform then hiked its rate to 7.29%.
Mortgageforce, a broker, has found them another deal from Bristol & West,
also fixed at 6.69%.
THE BUY-TO-LETTER
Mick Roberts, a buy-to-let investor from Nottingham, has recently remortgaged
10 of his properties because they were on deals that tracked the three-month
Libor rate, which has recently shot up.
Roberts, 29, has switched them all to Bank-rate trackers with Woolwich.
He said: ‘I’m glad to be rid of Libor-linked deals.’
THE BONUS EARNER
Director Maria Magnussen-Macher, 37, from Chelmsford in Essex, relies on
bonuses for a large proportion of her salary at the mortgage broker Savills
Private Finance.
Her mortgage deal ends in November and she hopes to be able to sort out a new
loan before lenders start tightening their criteria on bonuses.
However, she fears other high-earners may not be so lucky: ‘There’s no doubt
about it, lenders will be more cautious, and that is no bad thing.
‘It could make a big difference to the borrowing power of people like me who
earn big bonuses.’
THE REMORTGAGERS
Lisa and Matthew Saunders, 25 and 34, of Leighton Buzzard, Bedfordshire, have
remortgaged to a five-year fix from Bank of Scotland. The rate is 6.29%,
compared with their previous rate of 5.39%.
They released some equity from their house but extended the term on their
mortgage so their payments didn’t shoot up.
