Credit Crunch To Affect Ordinary Borrowers

The global credit crunch looks set to have an impact on the ordinary man or woman on the UK street. According to experts, borrowers will face more stringent checks on their finances when applying for credit cards, loans and mortgages, and they are likely to face higher interest rates too, if their finances don’t come up to scratch.

As the global crisis in money lending continues, it will finally find its way to the public after weeks of turmoil on money markets around the world. Already credit card customers are finding it more difficult to switch debts around, according to reports.

Recently many sub-prime mortgage lenders have either pulled products, or raised interest rates and tightened up on lending criteria after the problems with credit around the world.

The crisis has its roots in the US where borrowers, having borrowed at low interest rates, suddenly found they couldn’t make repayments when interest rates got higher, and began to default on their mortgages. This situation is not expected to ease very soon, and US housing demand is now at a six-year low. The knock-on effect has resulted in banks being unwilling to lend to companies and other banks.

Seven Investment Management’s Justin Urquhart Stewart said: “Banks have had to tighten up because they simply have less to lend – they have suffered losses in the market turmoil. Borrowers with less than a perfect track record will either not get a look in or they will have to pay a premium to borrow money.”

Experts now fear that a simple fault on someone’s credit history will count against them out of proportion to its seriousness. Would you like to be refused a mortgage because you once missed a repayment on a mobile phone bill?

Neil Munroe of Equifax, a credit reference agency, said: “Lenders are looking far deeper into people's credit histories. They will be looking for early warning signs of how borrowers deal with credit. Lenders are more interested in how borrowers service their debt than simply whether they have kept up with payments in the past.”

The level of debt in the UK has continued to rise, and is now at more than £1 trillion. Banks are getting stricter on their rules for providing unsecured loans, and credit card providers appear to be tightening their checks too.

Mr Munroe said: “There has been a number of reports from credit card organisations stating that bad debts are rising and banks are increasing their provisions to tackle this. Credit card tarts, those who are moving their balances onto 0% deals, are also finding they are getting turned down more and often it is the case that there is nothing wrong with their credit history but the lenders are just saying no.”

The shift of emphasis is also evident in the sub-prime mortgage market. G-MAC RFC, a well known sub-prime lender, used to offer loans-to-value of 95%, but this has been reduced to 90%. The specialist lending arm at Scarborough Building Society has also pulled its high level sub-prime self-cert products, and its maximum loan-to-value on general self-certs has been reduced from 90% to 85%.

Tom Smith
14th September 2007

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