The credit crunch refers to the difficulties of borrowing money in the financial sector.
This is a simple step by step guide to how the credit crunch is likely to affect UK mortgages.
- Rapid increase in mortgage defaults in US mean that many mortgage lenders have to write off bad debts.
- These Bad debts were often rebundled and sold onto other finance insitutions and banks.
- This means many investment banks and commercial banks have also had to write off bad debts, sometimes totalling billions of pounds. These bad debts have overwhelmed banks such as Bear Sterns and threatens Lehman brothers.
- Because so much debt has had to be written off there has been a drop in banking confidence. Banks are hesitant to lend to each other because they fear they could lose it.
- This means there has been a shortgage of lending and money on the money markets and in particular the interbank lending markets.
- Therefore, it has become difficult to finance regular mortgages because banks struggle to raise the money on the money markets. The shortage of liquidity hit Northern Rock because they were very dependent on raising funds through the money markets.
- Because borrowing is more difficult, the cost of borrowing rises. This means banks are
- Withdrawing any mortgage products that feels risky e.g. 125% and 100% mortgages.
- The cost of standard mortgages such as tracker and variable mortgages are rising
Will the credit Crunch Get Worse?
At the moment UK banks have increased lending costs by a relatively small amount. But, if the credit crunch continues to worsen, they could be forced to withdraw more mortgage products and increase borrowing costs even more.
How Does Credit Crunch affect my Mortgage?
- If you are on a fixed rate or Tracker mortgage, the terms have to be kept to until the end of your agreed term. However, when you remortgage you could find the cost of mortgages has increased.
- If you are on the banks standard variable rate you are likely to see higher SVR rates, even if the Bank of England cut base rates