Get ready for return of mortgage deal rationing!

It looks like 1970s-style mortgage rationing may return. Malcolm Wheatley explored what it would mean - and how to cope

In the early summer of 1981, my wife and I took the afternoon off work, put on our best suits, and went for an interview with the Halifax.

As with most interviews, the questions that we faced were designed to probe if we really were the hard-working and industrious types that we'd claimed on the application form.

But no, we weren't applying for a job. Instead, we were applying for a mortgage -- and such interviews were a perfectly normal procedure at the time. As were other strict requirements, such as a pass book showing a history of regular saving with the financial institution in question.

We got our mortgage, all £14,000 it. (Yes, a whole £14,000 -- really!)  But not quite with no strings attached: although we were comfortably within the specified earnings multiple, the loan-to value ratio meant that the building society imposed a hefty (and mandatory) insurance premium on the amount of the mortgage that exceeded the stipulated loan to value limit.

Again, such strictures were perfectly normal for the time. Want a mortgage? Then you'll have to play by our rules. Viewed through today's eyes, it was the mortgage market's Bad Old Days.

But could they return?

Last week, the Council of Mortgage Lenders warned of a £300 billion funding gap opening up between 2011 and 2014, as government schemes put in place to support the market during the credit crunch start to expire.

Back in the 1960 and 1970s, mortgages were chiefly funded by retail deposits from savers -- hence the mortgage rationing that my wife and I encountered.

Building societies lent to only the very best credit risks, and even then imposed strict terms and conditions. Another common requirement -- that my wife and I also fell foul of -- was the need to make mandatory property improvements within a specified time frame.

Rationing eased as first building societies -- and then banks -- began to offer mortgages funded not from deposits, but from money market bonds traded in the City of London and other world stock markets.

And it was when such markets froze in the summers of 2007 that first Northern Rock and then Bradford & Bingley collapsed. Attempting to forestall further meltdowns, the government effectively propped up the markets with standby funding.

That funding is now in the process of being withdrawn -- forcing lenders once more to seek funds from sources other than retail deposits.

Funding gap

The Council of Mortgage Lenders states bluntly that retail deposits won't be enough to fill the £300 billion gulf that will yawn as the government winds down its involvement in propping up the market. And unless a strategy emerges to restore sustainable mortgage funding, it warns the mortgage market will shrink.

For which read: a return to mortgage rationing.

And mortgage rationing isn't pretty. The self-employed, for instance, often struggled to get any sort of mortgage at all in the Bad Old Days. Why should a bank or building society take the risk -- when there was a queue of sober and hard-working people with steady jobs?

The young, too, struggled. Firstly, because they failed the earnings multiple tests, and secondly because they failed the loan-to-value tests. 100% mortgage? Don't make me laugh. 95%? 90%? 85%? Ditto. Start saving for a deposit, lad -- and in the meantime, rent or live with your parents.

Competition was limited, too. Mortgage rates were high, and borrowers were glad to get whatever deal they were offered.

Will it happen?

Of course, the Council of Mortgage Lenders is painting a gloomy picture. Put bluntly, it wants the government to extend its assistance to the markets -- or at least, withdraw it a bit slower. That may yet happen.

And even if it doesn't, there's little doubt that longer term, market conditions will ease. Wholesale mortgage funding will resume, and the reliance on retail deposits will lessen.

But having seen banks as diverse as Lehman Brothers, Northern Rock, Halifax-Bank of Scotland and Bradford & Bingley all brought to their knees, wholesale funding rates will carry a hefty risk premium. Cheap money it won't be.

What can I do?

The last two years have seen borrowers and would-be borrowers on something of a roller-coaster ride. Many have had to make painful adjustments -- including those borrowers with Skipton Building Society who last week got an early taste of things to come.

In the short term at least, it looks like being a return to the 1970s. Save regularly, build up a deposit, and then dip your toe in the property market in a small way.

So welcome, once again, to the Bad Old Days.

Get help from lovemoney.com

If you want to get your finances in shape to cope with mortgage rationing, there's plenty of ways lovemoney.com can help.

First up, sign up to the hints and tips in this goal: Build up your savings

Next, have a watch of this video: Earn £235 extra by switching your savings

And finally, if you have any questions about how you can get yourself ready for mortgage rationing, why not see if your fellow lovemoney.com users can help in our Q&A section?

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