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In a short and to the point sentence, the Nationwide has summed up the new situation for mortgage borrowers following the recent credit crunch problems

“From now on risk must have its price”

This is what they mean by this statement:

• High loan to value (LTV) mortgages, which are inherently more risky than those with lower LTV’s, will be more expensive from now on. For example 95% mortgages now have 0.45 percent higher rates than 75% mortgages.
• Sub prime borrowers, who also represent more risk to the lender, will also pay more for their mortgages from now on.

The Nationwide also predicts that as highly leveraged borrowing (mortgages with high LTV’s) will become more expensive, the number of these mortgages will decline in the future. This will probably impact the property market, particularly the buy to let sector, which depends on high LTV’s to raise funds to purchase property for growing portfolios.

It is not just budding property entrepreneurs who may be affected by this tightening of lending criteria. First time buyers largely depend on 95 percent or even 100 percent mortgages to buy their first home. They too will find mortgages more expensive and more difficult to obtain, particularly if they have any credit impairment.

So there do appear to be a number of factors that could force house prices downwards, or, at least, slow the rate at which they increase in value.

All is not bleak, though. The Nationwide also predicts that Bank of England interest rates are less likely to rise now, which is good news for those who are willing to borrow less and have taken care of their credit records.

Barratt Developments, one of the largest house builders in the UK, is warning that house prices may fall in the short term as a result of the recent interest rate rises and a squeeze on credit resulting from the recent problems with Northern Rock.

This is a quote from the Barratt Chief Executive:

“The recent credit squeeze has further affected customer sentiment and pressure on lending institutions has led to a tightening of lending criteria and mortgage availability.

“It is not yet clear how quickly the market will recover but we have to assume that there will be downward pressure on [house] volumes and price inflation in the short-term.”

I guess that this is to be expected after the recent turmoil in the financial markets, however it is interesting to note that Barratt are not mentioning home information packs (HIPs) as a factor that might depress market demand.

It is too early to see how the credit crunch is affecting consumers, however the Bank of England seems to think that it is corporate, rather than consumer lending, that will be squeezed the most.

So if one of the largest house builders is preparing for falling house prices in the near future - though they remain confident that housing demand will outstrip supply - then we, too, should prepare for a fall in the value of our homes.

Self certification mortgages sound a great idea. Tell the mortgage company that you are earning more than you actually are and you have access to bigger mortgages, even though the monthly payments may be close, or even exceed monthly take home pay.

Much of the buy to let market is fuelled by self certification mortgages and apparently around half of all sub prime mortgages are self certified. Sub prime mortgages and remortgages attract high commissions and brokers often charge huge arrangement fees knowing that sub prime applicants often have very few options if they want to extend their borrowing.

I know of one broker that charges over £3000 arrangement fees for a sub prime remortgage, but as these fees can be added to the mortgage, the borrowers swallow this even though it adds to even higher monthly payments.

Because sub prime mortgages are so lucrative, it is in the brokers interest to win this business, almost at any costs. Self certification allows the broker to encourage the applicant with credit problems to borrow more so that they earn more lucrative commission. Apparently some brokers have even encouraged applicants to fill their forms in in pencil so that they can tweak the earnings to meet the income requirements of larger loans.

Confronted with evidence from the BBC, the FSA is going to crack down on lenders and brokers involved in this overselling or mortgages and remortgages. It has even banned some brokers and intermediaries.

The problem is that these practises in the UK sub prime market echo the troubles experienced in the sub prime sector in the USA and we all know what damage that is doing. If the UK is to prevent a similar sub prime crisis, the FSA is right to crack down on the bad practises adopted by some brokers.

The lenders must take responsibility too by being vigorous in checking that stated self certified earnings are accurate and truthful.

This article from the BBC explains more about the problems with sub prime self certified mortgages

This link points to the BBC Radio File on 4 programme that illustrates some of the problems caused by self certification mortgage mis-selling.

I know that the title of this post sounds bad - after all we should all do our bit for the environment and I do care about my own carbon footprint.

There are many environmental benefits to hybrid cars, and we published an article about some of the ways in which the Toyota Prius can reduce motoring costs on MoneyHighStreet.com today. So please don’t think that I’m aganst green cars and all that they can do for our environment. I’m not - far from it.

However even though I am looking to replace our car at the moment, I have decided against the Prius for these reasons:

The cost (monetary) of the hybrid technology creates a car that is over-priced against similar cars. As the Toyota Prius costs just over £20,000 for the top of the range model, you can get a similarly sized and specified Ford, Peugeot, Citroen or Vauxhall for around £18,000. So you are paying approximately £2000 for the hybrid technology.

I wonder about the cost (environmental) of the additional electrical motor and electronics that are needed for the hybrid technology. The overall environmental impact of the materials required must be greater for a hybrid car than one with a conventional motor.

The last point is that I think it is better to wait until the next generation of diesel engines are available. The Volkswagen Polo BlueMotion, which is currently available, has CO2 emmissions of 104 g/Km, which are the same as the Prius. Very soon we will see more manufacturers releasing cars with CO2 emissions below 100 g/Km.

So there is a price to pay for being an early adopter of the hybrid cars and it’s one that at this point in time I don’t want to pay. I will buy a diesel car for the environmental and cost benefits that brings, but even though I think the Prius is extremely impressive, and leads the way for the future.

If I lived in London and could save the £8 a day congestion charge, it would be a different matter, but for now, the Toyota Prius is not for me.

Changes are afoot in the loans industry at the moment. The credit crunch and recent difficulties experienced by Northern Rock is starting to have an effect.

I’m hearing rumours that two lenders are withdrawing from the loans market altogther. I can’t say which ones at the moment as I’m not sure if they have announced the situation. Both are “off balance sheet” which means that they work in the same way as Northern Rock - they borrow money at one rate and then lend it at a higher rate.

We’ve seen the impact that this business model has on Northern Rock (whose shares are still in the doldrums). The financial institutions behind these two lenders are US based and have sustained heavy losses in the credit crisis.

So two mainly sub prime lenders are exiting from the UK loans market.

But that isn’t all. Mortgages PLC are not going to lend to “heavy adverse” applicants any more and are reducing the acceptable loan to values of their other sub prime mortgage products. Even their near prime and self certification mortgages will have their maximum LTV’s reduced from 90 percent to 85 percent.

I mentioned a few days ago that the Northern Rock crisis will affect many more people than just its customers.

We’re seeing the start of a tightening of lending criteria. Those with impaired credit histories are going to find it harder to borrow and are going to have to borrow less.

The news that Abbey is considering providing 100 percent mortgages again got me thinking about how sensible they are at the moment.

The Abbey know what they are doing and take a sensible approach to lending but I personally wouldn’t feel confident in taking out a 100 percent mortgage in the current house market.

After all if you have a 100 percent loan to value then you are in negative equity from the start, when you include all the other costs of buying a home.

I recognise that it is very difficult for young people to get on the housing ladder and 100% mortgages are often the only way to achieve that vital first home. However I wouldn’t take one for these reasons:

• To move into positive equity in your home, you need house prices to increase. As I said yesterday, house prices during 2008 will probably plateau.
• Predictions for the property market in the future are no longer as buoyant as they have been as houses are now so unaffordable.
• It is too early to predict what the impact of home information packs (HIPs) will be on the property market.
• The rates of 100 percent mortgages may increase to offset the greater risks to the lenders, particularly following the recent credit crunch problems.

To those desperate to own their own home, this is not good news, however it must be sensible to rent for a while, building up a 10% deposit in a high interest savings account.

Whatever happens to the property market, it is unlikely that house prices will increase faster than your ability to save a deposit, as has happened during the last few years.

The Royal Institution of Surveyors (RICS) is predicting that house prices will be flat in 2008 and there is a ten percent chance of them suffering a 1990’s style crash.

It is the effect of recent interest rates rises that will subdue the property market, rather than the recent turmoil in the banking industry, according to RICS. However should the credit crisis extend into next year, then house prices could be hit more than is currently being predicted.

For all those buy to let investors looking for capital growth as their main means of earning from their property investments, this is bad news. Mortgage rates will probably remain high for quite a few months and rental incomes are unlikely to increase significantly, particularly if house prices become more affordable.

Even Alan Greenspan, the much admired former chairman of the Federal Reserve in the the United States, is predicting trouble in the UK housing market. This is because so many home owners in the UK have variable rate mortgages and are vulnerable to increased interest rates.

So if you are looking to invest in property at the moment, everything is pointing to keeping your cash in a high earning deposit account instead, unless you can negotiate a stunning deal in a quieter property market.

Let’s celebrate some good financial news today as inflation has fallen slightly to 1.8 percent. As that is below the governments self imposed threshold of 2 percent, it is safe to assume that interest rates will not rise for the foreseeable future.

In fact the next move for interest rates may well be downwards, though I can’t see this happening for several months, unless we experience a worsening of the credit crunch problems.

While I am feeling buoyant, I’ll mention that shares in Northern Rock and other vulnerable banks such as Alliance and Leicester have bounced back today in response to the move by the government to guarantee the deposited funds in Northern Rock.

As I said in my previous post, it would probably have been a blood bath in the banking industry today without the new Bank of England’s funding guarantees.

But those renewing their fixed rate mortgages still have some difficult choices to make. With fixed rate mortgages becoming cheaper, but discounted rates becoming more expensive, now is the time to navigate through this confusing situation to secure the best possible deals before any more turmoil descends on the finance markets.

I wonder if the the news that the government is willing to guarantee all the deposits at Northern Rock is about helping the stricken bank out or about stopping the rot spreading throughout the UK banking system.

With shares in Alliance and Leicester being badly hit in the last half hour of trading - they slumped 31 percent today - there must be concern in government circles that that bank could be next in line for a crisis of confidence and a mass withdrawal of funds.

So in the few hours after trading today, the Bank of England has acted to guarantee that all monies deposited at Northern Rock will be completely safe. Presumably they were dreading the impact on the banking system tomorrow if they failed to act today.

Two banks collapsing would be horrific for the financial system, in which confidence and stability underpin most activities.

Whilst I think that the government has made some terrible mistakes in recent months - and Gordon Brown cannot shed the blame for this - at least there is now an unprecedented guarantee in place. Lets hope that this stops the current crisis of confidence in the banking system turning into an unparalleled disaster.

“Your money is safe” says Adam Applegarth, the Chief Executive of Northern Rock, but with people queuing for hours out side Northern Rock branches, desperate to withdraw their savings, what he says and what his customers fear, are worlds apart.

One person I saw interviewed on the TV news just now had been trying to log in to her Northern Rock account for four days. She gave up and travelled 50 miles to her nearest branch to rescue her savings. With confidence in Northern Rock draining away as fast as the bank’s deposited funds, it is no wonder that its customers will go to great lengths to withdraw their savings as fast as they can.

If I had savings with Northern Rock, you would find me queuing outside one of their branches too.

So should we all be concerned about what is happening to Northern Rock?

Northern Rock is not one of the biggest banks, and is mainly just a lender or mortgages and personal loans. However it now supplies 9 percent of all mortgages in the UK so if it fails almost ten percent of all home owners in the UK will be affected in some form. That is a lot of people.

Other banks are being affected too - the Alliance and Leicester share price is down 16 percent today, for example. But its not just the banks who are seeing investors head for the hills - Barratt developments has lost almost 7 percent of its share price today too.

And that is the problem, or at least one of them.

Other banks, particularly those with a heavy exposure to the mortgage market are not immune to the problems that Northern Rock has experienced and could be next in line for a crisis of customer confidence. This is why the Alliance and Leicester shares are suffering so much.

Another bank sharing the fate of Northern Rock would have huge ramifications for the whole banking system in the UK.

So why the fall in the shares of Barratts, the house builder?

Well we are seeing mortgages rise already, but as I’ve said before, the sub prime market is going to find it harder and more expensive to arrange mortgages in the future. There can be no doubt about that.

Less availability of mortgages means less demand for houses and therefore a potential threat to the housing market.

We’ve published more about how the Northern Rock problems could affect you on MoneyHighStreet today. It is a fact that even if you haven’t got savings or a mortgage with Northern Rock, recent events will affect us all as widespread changes in lending practises are inevitable.

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