UK mortgage crunch
I was listening to a money programme about the credit crunch in the UK this morning on my iPod Wake Up To Money (Podcast). They were discussing ways in which the credit crunch was made manifest to home buyers in the UK. In the broadcast, the presenters mntioned that mortgage rates are effectively were they were when the crunch began last August. So where is the crunch coming from?
- LTV: There was a time when loan to value on some mortgages could be over 100%. Those days are well and truly over. In the late 1990s boom time, I recall LTV rates generally being no more than 90%. A few lenders (Bradford & Bingley if I recall) did offer 95% LTV. But, one had to purchase insurance and pay higher rates for any LTV above 75-80%.
- Credit Scoring: Fewer people are getting loans. In the old days, not every Tom, Dick and Harry could get a loan. Mortgage lenders have again tightened up their standards for who even qualifies for a loan
- Income Multiples: This is where things got totally out of hand. It used to be that income multiples were 2.5-3x annual salary (bonuses were treated differently by different lenders). Some lenders (again Bradford and Bingley) would advertise in magazines like What Mortgage for 3.5x salary. In the peak bubble years, one heard ridiculous multiples of 6x-8x salary.
So in 1998, if one made say £30,000, one could borrow £90,000 for a house worth £100,000. At a first time-buyer rate of 5.99%, the mortgage would come to £598.81 per month.
In 2006, if one made the same £30,000,one could borrow up to an eye-popping £240,000 (for a house worth only £230,000). At a first time-buyer rate of 5.99%, the mortgage would come to £1,437.38 or £17,248.56 a year. And this doesn’t include thins like maintenance, mortgage insurance, and leasehold rent charges. The story would likely be similar in the US.
How did things get so out of hand?