Since the credit crunch began, two in five home loans have vanished. Where have over 6,400 different mortgage products gone?
The UK mortgage market was very lively in the first half of 2007, as new lenders entered the market and existing lenders added to their product ranges. Of course, this general expansion in lending has helped to support the UK's seemingly never-ending housing boom. However, things took a turn for the worse in July, thanks to a global credit crunch which has left lenders fearful of taking on too much risk.
Last month, ongoing liquidity problems in the inter-bank lending market hit home at Northern Rock. The Newcastle-based lender relied on the money markets to raise three-quarters (75%) of its mortgage funding. Thus, when the cost of borrowing from other banks soared, the Rock was forced to take emergency funding from the Bank of England. Its share price collapsed and the takeover vultures are now circling.
However, the credit crunch is far from over -- and the repercussions of a tighter lending market are still being felt. According to Fool partner Moneyfacts, mortgage lenders are pulling thousands of products. Indeed, the mortgage market has shrunk like never before -- I've never seen anything like it in my two decades in financial services.
According to Moneyfacts, the number of home loans has been slashed by around two-fifths (41%) in just three months. In total, over 6,400 different mortgage products have been withdrawn. The table below shows that the biggest cutbacks have come in the subprime market, both in home-buying and buy-to-let:
The shrinking mortgage market: quarterly change
Lending sector | No. of loans (July) | No. of loans (Oct.) | Reduction | Percentage pulled (%) |
|---|---|---|---|---|
Subprime residential | 1,383 | 392 | 991 | 72 |
Subprime buy-to-let | 8,148 | 3,777 | 4,371 | 54 |
Prime residential | 2,265 | 1,827 | 438 | 20 |
Prime buy-to-let | 3,803 | 3,192 | 611 | 16 |
Total | 15,599 | 9,188 | 6,411 | 41 |
Source: Moneyfacts
As you can see, one in five mainstream home-purchase loans (20%) has been withdrawn, along with a sixth (16%) of all prime buy-to-let mortgages. However, there's been an outright collapse at the subprime end of the market. Indeed, an astonishing five in seven `impaired credit' home-buyer loans (72%) have been pulled, along with more than half (54%) of subprime buy-to-let mortgages. Overall, for every five mortgages available in July, only three remain today.
It's worth pointing out that some lenders have wielded the knife more aggressively than others. The takeover of Portman Building Society by Nationwide Building Society has led to a predictable rationalisation of the enlarged group's mortgage range. Then again, the shrinkage has been especially severe at Northern Rock, which has seen its mortgage range drop from over 230 products to just 70.
In my view, the subprime mortgage market was an accident waiting to happen. Like Icarus, it flew too high, too fast. Having been the fastest-growing mortgage sector this year, it's now suffering the biggest decline. In addition, the wheels are set to come off the buy-to-let bandwagon, with almost five thousand buy-to-let mortgage products withdrawn in the past quarter.
Furthermore, as well as pulling higher-risk mortgages, lenders have also tightened their terms and conditions across their remaining products. Lenders are seeking a new balance between risk and reward. Thus, they are demanding higher deposits, lending lower multiples of salary, and weeding out self-certification `liar loans' in favour of positive proof of income. Indeed, anyone who has credit problems, an irregular income or is at the fringes of affordability may now find it difficult, if not impossible, to borrow at reasonable rates. Ouch!
Frankly, these figures paint a grim picture for homeowners, property investors and those struggling to get their first foot on the property ladder. In the short term, a shrinking range of mortgages means less choice for borrowers, making it harder to get credit. In fact, without the fuel of cheap credit, the fires of the housing market are sure to go out. At best, this mortgage crunch will cause the housing market to stagnate -- at worst, it could be the trigger for a full-blown crash.
Of course, a return to cautious sensible mortgage lending will blow off some of the froth from today's property market. However, it may have longer-term benefits, with improved caution by mortgage lenders leading to increased long-term stability in the housing market. Then again, you can wave goodbye to double-digit yearly increases in house prices for the foreseeable future...
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