It is a decade since investment bank Lehman Brothers went bust, triggering a global financial crisis which resulted in widespread changes to the UK mortgage market.
Here, we look at how the credit crunch affected borrowers, and who the winners and losers are.
Why most mortgage borrowers are winners from the credit crunch
The financial crisis saw interest rates plunge in the UK. In July 2007, the base rate was 5.75%, but by March 2009, it had fallen to just 0.5%, meaning millions of homeowners saw their monthly mortgage payments fall substantially. Prior to the collapse of Lehmans, the lowest tracker rate available was 0.01% below the base rate, so some borrowers ended up with mortgage rates as low as 0.49% after the base rate fell to 0.5%.
David Hollingworth, spokesman for L&C said: “The Bank of England Base Rate plummeted in the wake of the demise of Lehman’s, which for some existing borrowers meant monthly payments were more on par with a mobile bill than a mortgage. Ten years on, fixed rates, which is the product of choice for the majority of mortgage borrowers, have hit record lows and remain exceptionally cheap.”
Cheaper mortgages – but stricter lending criteria
Although many homeowners have benefited hugely from low mortgage rates, the credit crunch saw lending criteria tighten rapidly. This was followed by stricter regulation of the mortgage market, with the 2014 Mortgage Market Review resulting in more stringent affordability checks. Mr Hollingworth said: “The Mortgage Market Review has ensured that, despite the much-improved lender appetite and competition, criteria standards have not simply reverted back to the looser requirements of 2007. That does mean that borrowers should still expect there to be more questions around their expenditure as well as their income to demonstrate affordability.”
Although lending criteria has tightened, the good news is that for buyers with only a small deposit to put down, there are now a lot more options than there were during the credit crunch, when appetite for riskier lending shrank. Rates are considerably more competitive, even for those looking to borrow up to 95% of the property value.
The losers – ‘mortgage prisoners’
The introduction of stricter lending rules has however left a number of homeowners unable to remortgage to a cheaper deal, as they no longer fit current lending criteria, or their circumstances have changed since taking out the mortgage. In extreme cases a borrower may be unable to switch onto another deal with their current lender, because it is no longer lending and doesn’t even offer deals to existing borrowers.
However the trade body UK Finance and the city regulator the FCA are currently working with active lenders to see how they can help longstanding borrowers, following an interim report published earlier this year.
If you’re unsure whether you can remortgage, or you would like advice on the best possible deal for you, a mortgage broker can do the research on your behalf. Even if you are with an inactive lender, it is still worth seeking advice on the options available to you, as the mortgage market has become more flexible and competitive in recent years.
10 years on from the credit crunch – the impact on the mortgage market