A credit crunch can have a serious influence on mortgage borrowers. As mortgage lenders feel their profit margins tighten, and many hit financial obstacles, the number of mortgage loans available and the choice of products fall considerably.
Furthermore, a credit crunch affects most businesses and is often accompanied by high inflation, meaning that the consumer faces increased expense all round. A credit crunch can affect mortgage borrowers in the following ways:
The choice of mortgage products falls considerably as lenders restrict their deals.
The mortgages available may become fewer, as borrowers without a high level of equity or deposit fail to qualify for the best deals.
Borrowers in the sub-prime sector may find it impossible to get a remortgage.
As consumer confidence tumbles and house prices fall, borrowers may find themselves either close to or in negative equity – whereby the amount of money that they owe is greater than the value of their property. As interest rates rise and lending is restricted, levels of house repossessions and arrears soar, particularly amongst those lenders with greater risk in their mortgage books – those that have lent money irresponsibly.
More borrowers need debt advice and support to cope with the struggle of meeting mortgage repayment every month.
Mortgage lenders, including banks and building societies, face the threat of bankruptcy and may need government assistance to continue to function. For borrowers, this can have some implications, although the Financial Services Authority usually guarantees savings up to a certain point.
Other forms of personal lending to borrowers become much more expensive and restricted. Some products, such as car finance, fall in demand due to consumer confidence.
Borrowers coming off lower fixed rate mortgages may experience ‘repayment shock’ whereby they are forced to find a new mortgage loan and nothing on the market compares to their previous rate.