UK Mortgage Crisis
The United Kingdom has one of the highest home-ownership rates in Europe. Mortgages are the main way for individuals or companies to purchase residential or corporate property without the need to pay the full value upfront. Although it is not impossible, the average individual cannot usually afford to purchase property without the help of a mortgage.
However, mortgage lenders are currently withdrawing their products and only offering their best deals to a minority of their customers. It is becoming even more difficult to have a mortgage application approved: especially one which offers you a good deal. The reduction in the number of mortgage deals and applications approved is referred to as a mortgage 'crisis'. The main reason for this crisis is the global current 'Credit Crunch', which began towards the end of 2007.
Credit Crunch
A credit crunch (sometimes referred to as a 'credit squeeze' or 'liquidity crisis') describes an economic situation where banks will not, or cannot, lend, and investors will not, or cannot, buy debts. Essentially, it becomes more difficult to borrow money. This means that the economy suffers because consumers and businesses have less to spend.
Since banks are unwilling or cannot lend money, many mortgage lenders are unable or unwilling to offer mortgages, especially to those with poor credit rating. The number of mortgage applications currently being approved in the UK is falling as mortgage lenders reduce their mortgage ranges and only offer their best deals to those with excellent credit ratings. This is because they are only willing to lend money to those customers who are particularly low-risk: those who are very likely to repay their mortgage in full and on time.
Negative Equity
Negative equity describes the situation where the amount you owe on your mortgage is higher than the value of your property. This is a problem which particularly affects those with large loan-to-value (LTV) ratios. The LTV measures the size of the amount borrowed against the property's value, and is stated as a percentage. For example, if your mortgage is £187,500 but your property is worth £250,000, your LTV is 75 %.
If you have a high LTV and your property's value decreases, you could easily fall into negative equity. If you cannot meet repayments and are forced to sell your house, the sale may not cover the amount you owe, and fail to repay your debt. Negative equity has an effect on the economy as a whole: as borrowers realise that their mortgage debt is larger than their wealth, they cut their spending; businesses find it harder to sell non-essential 'luxury items', such as televisions, expensive clothing and fitted kitchens.
However, if you are able to keep up repayments and are not looking to sell your home, negative equity is not so much of a problem. This is because your monthly repayments are not directly affected by falling house prices, and so by the end of the mortgage term, you should have paid off your debt and own the property outright, regardless of whether you paid more for it than it is currently worth. It is worth noting however, that it is rare for house prices to fall dramatically in the long term; if you buy a property it is extremely unlikely that it will be worth less in thirty years, even if there are credit crises in the meantime.
Due to the credit crunch, an increasing number of homeowners are facing the problem of negative equity. Less and less people are able to obtain a mortgage and purchase property because lenders' application criteria is more strict. This makes demand for property low, and as a result house prices have fallen dramatically in the UK. Since the value of property is falling, those who took out mortgages within the last few years are particularly affected by negative equity because the amount they owe on their mortgage is still very high.
