Mortgage Crisis | Credit Crunch | Previous Predictions

Mortgage Crisis Previous Updates / Predictions

We've decided to keep a record of what we said in previous weeks - for your comparison. Sorry we've only kept last weeks so far. We'll root around for the previous weeks and try to upload them...

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The situation - at 6/11/08

Bank of England's biggest interest rate cut for more than 25 years

Base rate at its lowest level for half a century.

Following pressure from the governement, the bank finally agreed to pass on full benefit of the cut to their customers.

There had been fears that this might not happen - see below.

This will benefit an estimated £1.7 million people.

Only Barclays and HSBC have not yet confirmed that they will follow the rest.

Both these are notable for also having resisted going to the governemnt for a bailout.

In Barclay's case it seems they preferred seeking help from Middle Eastern governmental type funds. This much criticised move was widely condemned as an apparent attempt by Barclay's executives to be able to maintain large bonus payments to... themselves.

How might it affect you?

If you are one of four million homeowners on a tracker mortgage, ie where the interest rate you pay is always a set rate above or below the Bank of England base rate, you should see your payments reduce.

For example a £150,000 capital repayment loan will see a fall of almost £120 a month on the cost of mortgage repayments.

with an interest-only loan. it will be £187.50 a month

But note that many tracker mortgages have an agreed minimum rate that the lender will go down to. Check with your lender what this is.

If you have a standard variable rate mortgage none of the reduced interest rate might be passed on to you.

The banks claim this is because they borrow money from each other using a rate called LIBOR (London Interbank Offered Rate - if you care to know) - which is currently higher than the base rate.

If you have a fixed-rate mortgage you definitely will not see a cut.

Whatever happens, the mortgage lenders are likely to be much more conservative with their earnings to loan ratios.

It's back to the old days of 3 and a half times earnings for singletons or three times joint income for couples.

In general economic terms

The planned positive boost of the huge 1.5% reduction was immediately undermined by extremely bad housing market figures plus terrible forecasts for the UK economy by the International Monetary Fund.

The good news is that the government seems to be aware that it needs to make allowances for businesses, particularly small / medium sized ones in order for them not to needlessly go bankrupt. Not a bad idea considering that the people involved will only end up on the dole...

So where our magnificent banks are withdrawing overdrafts essential to cash flow and business survival, expect the government to announce measures to help.

However, even if this happens businesses will be affected by the inevitable drop in sales.

So weak businesses will be going under. Unemployment will rise.... home repossessions will rise when people can't afford their mortgage repayments.

New evidence that houses are being sold at a loss as a result of their owners being forced to sell.

According to a survey by the Financial Times and UKValuation, 5% of homes sold in August went for less that the owners had paid for them.

This is a huge increase for the same period a year ago when the figure was 1.4%.

These figures are "real" in that they come from Land Registry records of actual sales.

Bear in mind that this was before things got really bad ie the panic of October.

The new figures, as they emerge from the Land Registry, for September and October, are unlikely to be better.

It seems likely that property prices will fall. (They’ve already been falling for 6 months). It is simply a question of by how much. The International Monetary Fund says UK residential property is over valued by 30%.

While many intelligent people have been predicting a crash for at least 3 years it seems that the credit crisis caused by our clever friends in the city and on Wall Street will prove to be the tipping point.

Will lenders pass the cut on... as expected

Despite the massive 1.5% interest rate cut and urging from Gordon Brown, it is by no means guaranteed that the mortgage lenders will pass this cut on to the high street.

Government Ministers are urging the banks / lenders to do so and trying to sound tough. But here's the bottom line from the Chancellor, Alistair Darling,

"I believe that it is imperative that banks realise they have got to play their part in helping businesses and helping people.

Banks have to decide on an individual case, the terms and conditions on which they lend. That's what people expect, government can't decide that."

The fact is Brown would need to change the law if he wanted to force the banks and lenders to do this.

Remember the great majority of the people who run the banks have now been proven as having very little sense of moral responsibility.

After risking our economy with foolhardy financial practices, and then being bailed out with £37 billion of our tax payer money, these "masters of the universe" have never apologised.

And they continue to pay themselves astounding bonuses - which are at best rewards for failure. At worst they are arguably a criminal conspiracy to carve up ill-gotten gains among various boardroom cabals. Yes that's right. It's that bad.

So don't expect any action from many of the banks beyond further self-interested behaviour.

Lloyds TSB and Abbey so far are the only lenders to have promised to pass on the full cut to homeowners. Northern Rock - effectively owned by the Government - probably will aswell.

In fact most banks / lenders have done the opposite already by immediately withdrawing almost all mortgages packages that are tied to the base rate - to new borrowers. Nice.

Less than half of all mortgage lenders passed on last month’s half point base rate cut in full to their customers.

The situation - week ending 19/10/08

Mortgage rates fell over the past couple of months but things are now changing rapidly.

There are fewer serious mortgage lenders out there. Lenders have fallen from over 100 to only 30 in the last year.

Those lenders remaining are this week withdrawing their "products" from the market at an alarming rate. About 11% have gone so far.

The big bank rescue deal announced recently is generally seen as a good thing.

It seems it will avert complete and utter financial disaster - as in banks closing down and your money disappearing overnight - but there will probably still be a recession.

There were fears that Brown and Darling did not get the bank to guarantee that in return for the incredible bail out they would make sure they passed on some of the money to lend to the public.

This is an issue because while the banks might be having a lot of problems with each other (which is at the root of the crisis), it shouldn't make too much of a difference to normal people on "main street" as long as the banks continue to lend money to normal businesses and consumers.

So if our businesses can continue to have overdrafts to help their cash flow, then they will be able to function and pay the wages.

And as long as people can get a mortgage then the housing market will stumble along - albeit probably at a slower rate with lower prices...

But there won't be a complete crash.

In the past few days there have been reports that the Government will ensure the money is indeed passed down to the High Street.

But it is hard to know if this is the usual "spin" - or if the presence of Civil Servants on the boards of the de facto nationalised banks (pause for a little "wow" moment !) will ensure the banks do the right thing and start making the money move on the high street.

The latest on how it affects your mortgage

The credit crunch and UK property prices

First Time Buyers and the mortgage crisis

The Mortgage Crisis and Remortgaging

People Coming off Short Term Fixed rate deals

People Buying Property ie Selling to Buy

The Mortgage Crisis for People with Bad Credit History

The Mortgage Crisis and Mortgages for the Self Employed

General background to the current financial crisis

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