Lenders drawing their horns in

Ever since the ‘credit crunch’ started in the United States, there have been knock-on effects un the UK and beyond. These have not just affected mortgage lenders, but other investment institutions, due to the web of cross borrowing that supports the mortgage market. So how does this affect parents planning for school fees?

In essence, the problem is that lenders like to have as many customers as they can, so many of them package up ‘bundles’ of mortgages and sell them to investment houses and other banks, so that they then have money to lend again.

This has the effect of spreading mortgage debt around the market – and the world – so that when a large number of borrowers start experiencing trouble with their repayments, there was a massive knock-on effect. The problem is that too many banks, largely in the US but to a lesser extent in the UK, lent money to people who could ill afford the repayments, especially if the cost of money was to rise, as it did, last year.

This led to some mortgage defaults, but the real problem was that those companies who were buying bundles of mortgages from mortgage lenders, especially in what is known as the sub prime market (that is lending to those with less than ideal credit histories) became concerned that the mortgages may suffer a higher rate of defaults than they had allowed for. To a large extent this is probably attributable to excessive optimism (some may call it greed) amongst lenders and their financial backers. By allowing customers to become over-extended, they met targets, but stored up problems for the future, which are now coming home to roost.

The problem now is not necessarily the level of defaults but the lack of confidence in the market, which led to a crisis of confidence resulting in banks not wanting to lend to each other. This makes it more difficult for mortgage lenders and they have been closing down deals in large numbers, several have even ceased (temporarily it is believed) accepting new cases other than from existing customers. Those who can get a loan are facing far tougher lending criteria; gone are the days of an easy 95% mortgage.

But why, if headline interest rates are falling, do we still see mortgage rates going up – even for existing borrowers? The answer is that the rate at which banks lend to each other (known as the London Inter Bank Offer Rate or Libor) is going up as a direct result of the lack of market confidence. Since January, it has risen steadily despite a cut in the Bank of England’s base rate and is currently about 0.75% above ‘base’ rate. This means that mortgage lenders are having to charge more.

Defensive measures

There are a number of things that parents can do to help themselves, should they wish to re-mortgage for any reason, including:

• Check your credit report to see if there are any adverse comments Experian are currently offering a free 30 day trial;
• Make sure you never miss a credit card payment – this can affect your credit history;
• Don’t ‘test the market’ by applying for a number of ‘offers in principle’ this will affect your credit rating even if you go no further;
• Make sure your bank account is in credit.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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