All About Loans Weblog

Many homeowners are being encouraged by their brokers to lie about their income in order to secure large mortgages. To lie about your income in order to secure a loan is a punishable offence and could land you with a hefty fine or even a jail sentence.

A recent story has emerged about a care worker employed by the citizens advice bureau who claims she was advised by her broker to lie about her salary when trying to secure her mortgage.

Sandra Ashcroft, 59, told her bank she received a £35,000 salary as a mid-wife in order to secure a home loan of £102,000 in 2003. She then applied to increase that mortgage to £122,000 after telling the bank she earned £80,000 working in the public services. Ms Ashcroft actually only earned between £3000 and £5,500. 

What Mrs Ashcroft did was highly illegal and she was charged for obtaining money transfers by deception. She was given a six-month suspended sentence but the judge said that there was evidence to suggest that she had been steered towards giving misleading information. 

The danger often lies with the temptation offered by self-cert loans and mortgages. These were created for self-employed workers or business owners who don’t always have records of their income. Whilst these loans are vital for those who have an income that doesn’t come from a salaried job, there is a possibility for people to try to obtain credit they cannot repay by lying on their application.

So if you are thinking of lying on an application for a mortgage or even if your broker is encouraging you to lie do not be tempted. This is a very dangerous route to take and if you are caught out you could face losing your house, ruining your credit rating and even a jail sentence. So always consult the mortgage company or even a lawyer if you are unsure about specific details on your loan application form.

The last big crash in the property market happened back in the early 1990s and there are definite similarities between now and then, such as the rapid house price increases that have stretched affordability issues to the limit. Back in the early 1990’s it was high interest rates which started the crash, compared to now where it is simply the massive size of the average UK mortgage.

However there are also crucial differences between now and then. We don’t have the same sort of economic crisis that was affecting the market back in the early 1990s when people had no choice but to sell their homes as house prices fell and unemployment skyrocketed leading to a massive rise in negative equity.

In the 2008 housing market, house prices have already seen some startling drops. In March, house prices fell 2.5% on average across the UK, a plummet not seen for sixteen years in the midst of the 90’s crash. However, these days most sellers have the option of sitting tight and waiting to see what happens rather than having to slash their prices by any substantial amount.

This means that any correction that will happen in the housing market is probably going to be slow and drawn out.

What remains the greatest concern for the health of the property market is debt. Currently the UK borrowers owe somewhere in the region of £1.3 trillion to lenders. This is double the figure of 5 years ago. Currently homeowners are borrowing £1bn per day, despite a slowdown in lending. This figure includes mortgages, which typically is counted as ‘good debt’, as it is secured against property. But there is talk that UK property market is overvalued. Much of this debt is also ‘bad debt’; unsecured borrowing on overdrafts, personal loans, credit cards and hire purchase.

Whilst it has become normal in the UK to take out cheap loans to finance everything from weddings to cars, borrowers are now finding that rising costs of living are making those loan repayments a burden too far.

There are now increasing signs that more and more borrowers are struggling to meet their monthly repayments. Increases in inflation levels could leave many borrowers in serious trouble, despite last week’s rate cut.

New research released by the Council for Mortgage Lenders shows that affordability still remains one of the key concerns of the property market with first time buyer expecting to borrow roughly 3.38 times their salary on the value of a mortgage.

However affordability is not only an issue for first time buyers with home movers also finding the current housing market very expensive. Typically the average home mover will have to borrow 3.03 times their salary in order to buy a new property. The average home owner is now paying 17.2% of their income on servicing their home loan. This is the highest level it has been in 15 years.

The director general of the CML, Michael Coogen has stated that while affordability still remains a problem for many borrowers their may be a some relief yet to come. It is widely expected that interest rates will be cut by the Bank of England in the coming months. This cut will help many borrowers who are finding their monthly mortgage repayments increasingly expensive.

The market has become very segmented in the wake of the financial crisis to hit the credit markets. Mainstream borrowers can expect fixed rate deals to become cheaper as interest rates are cut, however the bad credit sector of the market will see their loan options restricted as lenders’ tighten lending criteria as well as reduce the amount they are willing to lend.

In the coming months lenders will increasingly price mortgages according to risk, this means that borrowers with poor credit histories will find it increasingly difficult to secure a cheap loan or even one at a higher rate.

The number of people being refused a mortgage has gone up by 60% in the past six months. Figures which were recently released show that almost 75,000 applications for new home loans were turn down by banks.

This could be seen as proof that lenders have started to listen to the Chancellor’s calls for more responsible lending. Recently banks and building societies have come under very heavy criticism from the Government for throwing money at borrowers who were than struggling to repay the loans. However, it is more likely down to the high inter-bank lending rate and poor availability of funds in the banking market.

Calls had come from the Financial Services Authority and the Bank of England as well as the Chancellor Alistair Darling for banks to stop lending money to people who couldn’t make the repayments.

Many borrowers are now coming into serious financial difficulty following last year’s rate rises and the global credit crunch which has seen banks seriously tighten up on their lending criteria.

Speculation is now growing that we may actually be heading for a property crash on a scale that has not been seen since the last crash in the early 1990s. Yesterday figures were released showing that March housing prices had dropped to their lowest rate in 16 years.

While the government has been busy blaming banks for the crisis, the shadow Chief Secretary of the Treasury is blaming the crisis on Labour Government policy which allowed a decade of easy lending which is now leading to major problems. However, American policy followed a similar trend, so Labour was not alone in thinking that consumer borrowing was healthy for the economy.

The Governments policies have also lead to a decade of record growth for the British economy and the Chancellor has claimed that the UK is in a much better position to deal with a housing crisis than it was back in the early 1990’s when the crisis was also followed by very high unemployment as a result of conservative government policy. Recent figures have shown that unemployment has recently dropped in the UK.

With the current situation in the financial markets it looks like there are going to be some pretty rough times ahead. There has been a serious loss of liquidity in the financial markets which means that banks are finding it more difficult to get access to the funds that they need in order to offer mortgages and cheap loans. What this means is that the price of credit will probably go up, and this is expected to show through on mortgage rates which will probably rise. Abbey has been the first high street bank to raise its main home loan products.

One of the suggestions that is being put forward by financial advisors is for those who are in a position to do so to overpay as much of their mortgage as possible. This will allow customers to reduce their exposure to increased interest rates. Studies show that a customer with an average mortgage of £100,000 who makes a £5,000 lump sum payment can reduce the amount of interest repaid over 25 years by £24,000. On the same mortgage, at a rate of 7.75%, a customer making overpayments of £200 a month would reduce the amount of interest paid by £66,047 over the life of the loan.

You should check the terms of your home loan with your lender but the vast majority of mortgages in the UK do allow a certain amount of over payments to be made without incurring any charges, so if you are in a position to do so, making overpayments pays off in the long run.

Don’t be fooled into thinking that the Bank of England’s rumoured rate drop plan will affect mortgage rates. Whilst there is talk that the Bank will drop the base rate from 5.25% to 5% in the near future, this is unlikely to affect the currently high inter-bank lending rate, which is responsible for the rate offered to you by your loan lender.

Speculation that the housing markets might be running out of steam was given another boost by new figures showing that the number of new home loans approved at the start of the year fell to their lowest level for sixteen years.

The figures which were published by the Council of Mortgage Lenders show that new loan approvals came to a total of only 49,000 in February. That figure is down by 3.5% from January and down 33% from February 2007. This is the lowest reading since early 1992, during the last recession.

CML’s director general, Michael Coogan, warns that the situation is likely to get much worse over the coming year.

Most experts are expecting plenty more downsides in the coming months which will eventually bring about a sharp fall in house price inflation. The housing market has a history of snowballing in times of recession, so a house price crash in the coming months cannot be ruled out.

The Bank of England data has show that while the credit crunch has impacted on the housing sector it has failed to deter consumers from taking on more debt with borrowers rushing to try and consolidate debts before they turn bad.

As the global credit crunch continues to bite, banks and building societies are tightening up further on their lending criteria making it increasingly difficult for borrowers to be approved for mortgages, loans and credit cards. The last remaining 100% home loan on the market is Abbey’s deal, which ends tomorrow and the Halifax are dropping their highest LTV rate to 95%.

With more and more financial institutions reporting profit results that show just how damaging the collapse in the US sub-prime sector and the resultant credit crunch really was, we are only now fully coming to terms with how damaging the credit crunch has really been and the squeeze is expected to continue.

The effects of the crisis are now fully apparent on high street lending with mortgage lenders withdrawing 40% of their sub-prime mortgages from the market as well as 16% of standard loans. Many of the standard loans which have been withdrawn were intended for first time buyers.

Over the past few weeks lenders have all but dismantled the 100% mortgage market, rates have gone up and good deals have disappeared.

Homebuyers are now at more risk than ever at losing the properties they are buying as mortgage lenders introduce barriers to lending at the last-minute. Convex Conveyancing, a legal firm, has found that problems between the time of exchange and completion have gone up by 10% in the past month. That type of problem was very rare in the past.

People who are having the most difficulty are mainly bad credit loan borrowers. Lenders have started to claim that not all the necessary paperwork has been provided after already approving the loan.

A new show entitled Affordable Britain has been launched in the capital and is aimed at giving key workers a chance to buy a house at a price they can afford. The ironic thing about the show is that all but one property has a price tag above £250,000.

The show has homes which are specifically reserved for key sector worker however the problem that some of the homes reserved for these workers cost as much as 15 times the average income of a nurse or fire-fighter.

This is all part of the government’s New Build Home Buy scheme. Most are only one-bed apartments and most buyers will only be purchasing a quarter share since the required minimum income levels make most public sector workers ineligible to purchase the whole property.

The government hopes that this scheme will allow those who are priced out of the property market to still be able to buy a share of a property, somewhere in the region of between 25% and 75%. Key workers are given priority, with first time buyers coming in second. While the scheme has been rolled out across the UK it is predominately focused on London since there has been a massive exodus of key workers from the capital in search of cheaper housing.

The show is mostly filled with apartments and very little houses. A typical offer at the show is to by a 30% share in a property estimated cost between £275,000 and £375,000. However you need a minimum income of £26,000 even to be considered as a contender, so key workers who have already been turned down for a home loan for a standard property may not find that they have enough income to take out a loan on one of these specialist homes.

Yet more evidence has been published supporting the theory that the housing market is slowing down. It has been reported that home loan lending across the UK fell in the month of February as the credit crunch cooled demand in the housing market.

The Council of Mortgage Lenders is now predicting that mortgage lending will continue to slow down in the months to come. This news came as several other industry bodies reported that lending had begun to slow.

Last year, Chancellor Alistair Darling lambasted lenders for fuelling an unsustainable boom in house prices by lending irresponsibly. The chancellor went on to urge banks to be more cautious with lending in the future.

The chancellor is also a predicting a slowdown in the housing market this year, something Mr Darling considers to be desirable after years of rapid growth.

Mr Darling believes the boom in property has come at the expense of lenders encouraging borrowers to overstretch themselves. He said lenders need to be more clear about borrows ability to pay back loans before they allowed a mortgage to be processed.

The results from a recent survey show that lending in February fell by almost 12% compared with the month of January. Lending in February amounted to £30bn.

The Council for Mortgage Lenders advises that lending usually drops off at certain points every year according to seasonal house-buying patterns. However, this winter has seen a drop in house buying and loan acceptances at a time when buying usually picks up.

The International Monetary Fund (IMF) in its quarterly Global Health Check has found that the UK, along with a raft of other European countries, have property values that are severely over-priced.

The model that the IMF uses to measure what the real value of properties should be in countries as opposed to their actual value has found that in the US, which has already had a house price crash, is more than one-third overvalued. The same model has found that the situation is even worse in Europe. The model which can explain certain increases in house prices through low inflation rates, increases in single person households and increases in income, has found that the unexplained share has grown considerably in the past decade.

The IMF does not put down the unexplained share of house prices as simply a result of people over-paying on the real value of property. Many other factors could account for why there has been such rapid growth in house prices in recent years including immigration. However the IMF has warned that house prices here in the UK could be very vulnerable to what the IMF refers to as ‘correction’.

The five rate rises which ended last year led to a cooling off effect here in the UK after years of house price boom. This is despite the two subsequent rate drops. The IMF now expects that the recent development in global financial institutions which has led to the global credit crunch will only add to that cooling effect. This means that new home loans will be increasingly hard to acquire and those with existing loans will struggle to repay them.