The end of cheap credit means a big shock for those who grew up on it

Have you noticed how mortgages are disappearing like snows in spring sunlight? Take a look at Money Guardian:

Some borrowers coming to the end of two- or three-year fixed-rate deals could currently be on a rate of 4%. This type of deal is now non-existent.

“Non-existent”. But it’s actually worse than that. The number of mortgage products available has shrunk from 7,726 to 5,700 – that’s a 27% fall, and in some cases mortgage lenders have simply withdrawn fixed-rate mortgages and are only offering variable-rate mortgages linked to the Bank of England base rate (or possibly, worse, Libor – the London Interbank Overnight Rate, which I first heard about in Michael Lewis’s Liar’s Poker: the trainees on their first day, in front of the chief executive at whichever investment bank it was were asked what Libor was. Woe betide if you didn’t know).

OK, so cheap mortgages are gone. And you know what’s next? Cheap credit cards. Credit cards that increase your credit limit endlessly when you spend more on it. That’s over. I don’t need to talk to City folk to feel this happening. You can see that it’s going to happen, like A following B: big-ticket credit (you can call it a mortgage) gets tight. Then small-ticket credit (call it credit cards) gets tight. I think that 0% transfer deals are already dead.

Which means that people who have spent the past ten years or so living off cheap credit – for flat-screen TVs, gadgets, gewgaws, shoes, clothes and of course don’t forget student debts… – are going to get a sharp, sudden shock as the tap is turned off.

That’s going to be ugly. But there is one small recompense: those who have been living off cheap credit are most likely the people who have found it impossible to get onto the housing ladder which has been infested with buy-to-let purchasers taking advantage of the tax breaks that buy-to-live people couldn’t. Which means, once they’ve waited for house prices to crash (yeah, let’s use that word) and saved up the 10% deposit that they’ll need, while having paid off their credit card debts, that they’ll be able to think about buying a house. If that’s what they still want to do.

But face this: the era of cheap credit is dead. It was fuelled by cheap lending generated from the US property market, leveraged by 20, 40, 60 for every dollar actually paid (or lent). Unsustainable, and now over as the banks try to regroup to discover some real money down there amidst all the paper promising to pay the bearer just as soon as it has figured out who actually owns the cash.

The credit crunch is nine months old, but it’s barely beginning in the effects it’s going to have on society.

7 Comments

  1. 0% transfer deals have been dead for ages anyway since they all started charging 2% or so when you transferred ages ago.

    I think that blaming the US property market is a bit of a smokescreen – I came across an interesting article the other day (can’t recall where) pointing out that the real problem is that the US government is simply printing money to pay for the war in Iraq which is why the dollar is falling in value, but of course they can’t admit this so blame the property market. However that isn’t to say that the sub-prime nonsense is not all part of it.

    Did you see those photos of Thai tailors’ adverts that hall been reprinted to quote prices in Euro rather than dollars?

  2. “Which means, once they’ve waited for house prices to crash (yeah, let’s use that word) and saved up the 10% deposit that they’ll need, while having paid off their credit card debts, that they’ll be able to think about buying a house. If that’s what they still want to do.”

    Yup. There’s something perverse about the recent “bad news for first-time buyers” stories. Removal of 125 per cent mortgages sounds like good news for the next generation. They’ll pay less for their homes and won’t spend 25 years repaying loans on carpets, curtains & cookers. I appreciate that the effect of reduced consumer spending is not great for the economy overall. But for your first-time buyer, what’s not to like?

  3. All the more reason to use the services of an ehical, fees free mortgage broker to source those products that are still out there. At your service!

  4. I’m still getting over the shock of finding out that a 1 bedroom flat 40 miles outside London costs 176 thousand pounds after a quick trip home to the UK over the weekend. All the smart folk in the US switched to 30 year fixed rate mortgages sometime ago. Its the other poor buggers who were hoodwinked by their financial advisers I feel sorry for. I never forgot that they all work on commission.

    Perhaps the shake up will help those who pay off their cards each month, you know, the ones who the credit card companies don’t make any money off….

  5. All Financial Advisors and Mortgage Brokers are not the same! All of my customers have the choice of paying a fee and receiving the commissions themselves or receiving our advice free. Its a bit short sighted to say ” I never forgot they all work on commission” that is simply the way the market operates in the uk (AT PRESENT!). My advice find a broker you trust find one who operates with ethically.

    The issue here I am afraid if the credit crunch does start to bite even more, is that a lot of sub prime lenders (many BACKED BY USA INVESTMENT BANKS) were so keen to lend in the buoyant UK market that the lending criteria was continually hacked away at until it was easy for everyone to get a mortgage – some brokers took advantage of that I agree and so did many borrowers who really could not afford the rate repayments anyway – whether they were encouraged by brokers remains to be seen by the FSA, I’ve certainly seen evidence of it at first hand and seen brokers who made an awful lot of money out of it as did the lenders – perhaps thats the next misselling headlines we’ll see.

    All in all deals are still out there, yes they are more expensive but as ever fixed rates must be seens for what they are an opportunity to set a payment within ones budget for a set period.

  6. What I meant by my comment (which is based solely on US experiences if it wasn’t clear) is more than once I received a quote from a broker for say 5.8%, then found out that another firm will give me 5.65%, only for the original broker to counteract with 5.5%. Now if he can give me 5.5% after finding out that I’m going to walk else where, then he can give me 5.5% in the first place. Its a very common occurrence in the states for brokers not to tell you the best price you can get, which is why I switched to using credit unions and bankrate.com for my present transactions. That is why I stated I never forget they work on commission.

  7. Great concept, but the price point seems high London Interbank Overnight Rate, which I first heard about in Michael Lewis’s Liar’s Poker: the trainees on their first day, perhaps thatch the next misspelling headlines we’ll see. Thanks to you.

    John

    Thanks

    ………………….

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