The Credit Crunch and the UK Mortgage Market

The Building society Act 1986 allowed Building Societies to demutualise which effectively permitted them to become banks thus enabling them to operate outside their usual roles namely receiving deposit monies and arranging mortgages. Many Building Societies including Northern Rock, Alliance and Leicester and the Halifax all demutualised and as a consequence then had to seek alternative sources of funding for the purpose of lending which included borrowing from the wholesale money markets.

In the UK the late 1990’s and mid 2000’s were a period of relatively low interest rates and a time when average property values increased by almost 300%. This caused great concern to potential first time buyers who were then unable to afford properties to help sustain the property market. With many lenders competing there were a wealth of innovative mortgage products available including offers of 125% loan to value, a relaxation of affordability calculations and the requisite funding accessed via the wholesale money markets.

Once the liquidity of the wholesale money markets and other credit lines began to slow as a result of the Credit Crunch it left many mortgage lenders exposed to huge debts with little or no way of acquiring additional funding to service these debts. Eventually in 2008 the UK government was required to step in and nationalise various banks including Northern Rock and Bradford and Bingley (both of course former Building Societies and Mutuals.)

As a result of the Credit Crunch and with the slow down of wholesale lending, borrowing has clearly become more difficult. This situation has also coincided with Mortgage Lenders tightening up borrowing criteria including a requirement for larger deposits, stricter rules on affordability and the assessing of income. Today both property and mortgage lending markets remain sluggish and are unlikely to improve until confidence is restored.

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