Whether we like it or not, 2007 will be remembered as the year of the crunch. The effects that are now beginning to bite deeper will hold on long into 2008 and for brokers, lenders and borrowers alike, the key will be in adapting to the changing situation.
Hindsight is a wonderful thing and perhaps if we had been slightly more sentient we would have realised that the Base Rate hike that was surprisingly put in place by the Bank of England at the beginning of the year was a sign of the surprising nature of what lay ahead.
However while events in the US non-conforming mortgage market were lit up brightly on lenders’ radars across the UK, the general feeling was that the more cautious approach that had been taken to offering loans in the UK would insulate the market from serious ramifications.
Clearly this has not proved to be the case and although many UK mortgage lenders do not have specific exposure to the doomed loans that were made in the US, the impact they have had on the price and availability of inter-bank lending has been unheralded, while investor appetite for mortgage-backed assets has taken a blow.
The first six months
Looking specifically at the first six months of the year, updates from the Council of Mortgage Lenders clearly highlighted the huge demand in the UK for mortgage finance. Whether people were moving home, getting onto the property ladder for the first time or remortgaging to safeguard themselves against further rises in interest rates, each month seemed to herald a new record.
Indeed, as recently as July gross mortgage lending reached a new record for the month, totalling £34.4 billion. Although this was down by 1 per cent on the £34.8 billion of lending achieved in June, it was 13 per cent higher than the £30.6 billion lent in the same month the year earlier.
However, since then there has been changing criteria, rate adjustments and changes to loan-to-values (LTVs). Lending for September of £30 billion was down by 12 per cent on the August figure and only 2.5 per cent higher than the year before.
However there is still a strong appetite for mortgage borrowing in the UK and the government is still publicly supporting a move to push owner occupation from 70 per cent to 75 per cent.
The problem though, is that if the funds are not available and investors are only prepared to buy certain types of loans, then there is only so much that can be done. The lesson here is that sometimes global forces are bigger than the market.
Cupboards are bare?
Innovation and expansion were bywords for the first half of 2007 and the market saw a 22 per cent increase in the number of products, according to data specialist Moneyfacts. The non-conforming market forged ahead as it introduced increased sophistication into its client catagorisation and pricing, while the buy-to-let juggernaut continued to steam on.
However by mid-October the shelves of the market were looking decidedly different. Moneyfacts said that between July and October there was a 40 per cent drop in the number of products available, with the non-conforming and buy-to-let sectors seeing the biggest cull.
The number of prime buy-to-let products fell by 20 per cent, while non-conforming buy-to-let deals were cut back by 72 per cent. In the residential market the losses were not quite so severe, but by October there were 54 per cent less non-conforming deals and 16 per cent less mainstream deals on offer.
In many ways this overall cut of 40 per cent will be good for the market and key lenders have not changed criteria or LTVs. The current environment will force lenders to assess where their core business lies and stress test their models to an extent they may not previously have gone to.
In the buy-to-let market some lenders minimum rental cover requirements have gone up, similarly the LTVs on offer have in some cases dropped.
Innovation has not died
However, while it is easy to see the picture as one of doom and gloom, it is also important to realise that by clearing out the old product sets, it will be possible for mortgage lenders to re-introduce deals in due course, but also to have improved their offerings.
It is also important to realise that innovation has not died and there are lenders coming to the mortgage market with specific deals for specific sectors, such as 125 per cent deals.
Of course, lending at this sort of level carries an amount of risk, but in the current environment this is something that everyone is very aware of and the product is designed to help, rather than hinder borrowers.
Now more than ever, suitability is key to any lending and borrowing decision and this is something that everyone in the market must be tuned into. Indeed some lenders have over recent months sought to increase the loan terms which they offer and in some sectors move away from only offering capital and repayment loans to provide interest only finance. In difficult circumstances both of these moves are positive steps and it is likely we will see more lenders trying to accommodate borrowers in this way.
For those existing borrowers who are coming to the end of a fixed rate deal and need to remortgage, the best option is to work as closely as they can with their lender and broker to find a solution that caters for their needs as effectively as possible.
Those who are looking to buy a property of their own for the first time may find themselves having to commit to the rented sector until they can again assess their position in the New Year.
The problems that over-stretching financially can create have been clearly demonstrated and while there will be people on both sides of the lending and borrowing spectrum who are put under pressure, keeping that number to a minimum is imperative.
In the same way that predicting how 2007 would turn out was a thankless task, doing the same for 2008 is equally as perilous.
What is certain is that buoyancy can return to the market just as quickly as it left and that having reappraised their operations, lenders will be raring to go when these restraints are lifted.
In a market that has been so fast-moving for the last 10 years, sitting tight is not something that will come easily.
However, for those who manage to maintain their core offering, and successfully plan how they want to extend when mortgage market conditions improve, there will be opportunities to take advantage of.
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