Mortgage market pain in store

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The last few weeks has seen mortgage companies take a number of steps that will make mortgages harder to get, and more expensive.

So what's going on, and why is this happening?

Tighter rules

Recent moves have taken a number of guises. The first is that they are tightening up the rules, and thereby making it harder for people to qualify for loans. This has been an ongoing process since the credit crunch first struck in 2007, and shows no sign of stopping.

The loan-to-value on some mortgages is being tinkered with. Halifax, for example, recently removed its 85% two year fixed-rate deals for remortgages, so the maximum it will loan is 75%. Others, such as Nationwide and Woolwich have made it harder to switch loans between properties during a move.

More generally, the market for interest-only loans is drying up, with some lenders puling out altogether and others toughening up their rules so dramatically that Boulger says: "the criteria are so onerous that most people don't qualify for them." This, he says, extends to the repayment vehicle. If you want to fund repayment with a stocks and shares ISA, for example, some lenders will assume zero growth of the investment when they are calculating your ability to repay.


The second is that the standard variable rates are rising. Just over a week ago Halifax, Britain's largest lender, joined the throngs of lenders raising rates. At the time the commentators warned that we would see more banks and building societies follow suit, partly because they feel the same pressures, but also because they don't want to be overwhelmed by applications.


And the third is an increase in charges. The fees associated with mortgage have risen a third in the last three years, and are now £1,500 on average. Of course, this doesn't necessarily indicate a poor deal, and borrowers have to calculate the total cost when they are comparing, but it demonstrates that lenders are looking hard for ways to make a profit in this environment.


All three are being driven by two factors in the market. Ray Boulger, an adviser with Charcol mortgage brokers says regulation has had a huge influence, because it means mortgage companies are trying to drive risk out of their lending portfolios. He adds: "Once a lender changes its criteria other lenders will be forced to as well, or too large a slice of their portfolio will be in certain arts of the market."

The other issue is that it is getting harder for banks to raise funding, and the crisis in the Eurozone has intensified this dramatically. Boulger says that until the crisis is resolved, the market will remain tight in the UK, and if it gets worse, we can expect lenders to get even tougher. Of course with the situation in Europe worsening daily, there's no real light at the end of the tunnel for those looking for a mortgage.
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