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BankruptcyNews
Junior Member
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 Posted - 25 September 2007 : 10:54:42
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Mortgage rates soar as credit crunch bites
Banks are turning away business, cutting lending limits and putting up interest rates as the credit crunch takes hold.
Fears over bad debt and the difficulty in borrowing money on the global markets is putting a squeeze on families.
Some firms specialising in mortgages for those with a patchy credit history have pushed up loan rates to an astonishing 11.5% - double the Bank of England base rate.
Barclaycard is turning down around half of applicants for its credit card and has cut the credit limit for 500,000 'at risk' customers.
Other firms are adopting a similar tough line following warnings from Bank of England governor Mervyn King about the perils of reckless lending.
The rules are becoming so strict that those who are behind with their mobile phone bill can find they are effectively on a loans blacklist.
Some analysts suggest the belt-tightening could take £50bn out of the home loans market.
HSBC is contacting customers who have overdraft facilities and credit cards they do not use to see if they still want them.
It said the move was part of its commitment to responsible lending, but it is not entirely altruistic.
Banks have been forced to write off billions loaned to those who could not afford to make repayments.
Barclays has revealed that bad debt on the Barclaycard hit £1.5bn in the past year.
The group said the strategy of turning away customers and cutting credit limits, which it began last year, is designed to cut the level of bad debt it incurs.
Barclaycard said it was looking at customers on a case-bycase basis and was using information available to it from other lenders under industry data-sharing initiatives.
In some cases it was leaving customers' credit limits unchanged while reducing the level of cash advances they can obtain with their card.
This is because there is evidence that those who use their card to get cash - which attracts punishing interest rates - are more likely to be struggling with debt.
Northern Rock crisis. It is undeniable, however, that they are part of a wider trend which means it is becoming harder to borrow.
Banks which specialise in providing home loans to those with a poor credit history, the self- employed and first time buyers who want to self-certify their income have made dramatic changes recently.
While some have dropped these mortgages altogether, others have raised their standard variable rate by as much as 2.5%.
The Mortgage Lender, a broker which specialises in finding home loans for such 'subprime' borrowers, is turning away 15% of applicants because finance companies are being more careful about who they will lend to.
Chief executive David Titmuss said: 'The highest rate for the most risky customers is 11.5% compared to 9% a couple of weeks ago. The average monthly mortgage payment for our customers has gone up by £63.50, but the worst hit have seen a rise of £200 a month.'
In the wider marketplace, Halifax has already announced it is lifting the rates of 20 of its tracker products by up to 0.2%. This followed similar rises by Bank of Scotland and Abbey.
Banks have moved from an era of feast - in terms of heavy lending - to famine in the wake of the world credit crunch.
This causes immediate difficulties for those being refused credit and it also threatens long-term stress for the economy as a whole.
Britain's economic success over the past ten years has been built on a sea of borrowing and spending by shoppers, who have kept tills ringing and filled manufacturers' order books.
However, this has driven personal debt, including mortgages, to a record £1.3trillion. If individuals find it hard to borrow either to go shopping or to buy a home, the rug could be pulled from under the economy.
The collapse of thousands of sub-prime mortgages in the U.S. left banks around the world nursing huge debts and unwilling to lend to one another. The resulting credit crunch meant Northern Rock could not borrow from normal commercial sources and had to go cap in hand to the Bank of England for emergency funding.
Certainly, Northern Rock will be forced to restrict the number of mortgages it offers in the coming months and demand higher rates on any new loans it offers.
In 2006 the total mortgage market was worth nearly £350bn. But Michael Bolton, chief executive of Edeus, a specialist mortgage lender, warns that around £50bn could be wiped off this annual figure.
He said yesterday: 'This is no longer a liquidity crisis - it is a banking crisis.'
Warning that house buyers will find it more difficult to get a mortgage in coming months, he told the magazine Mortgage Strategy: 'Are we on track for the mortgage famine? Is that what the policy makers want?'
Source: thisismoney.co.uk
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Mortgage rates soar as credit crunch bites
