by Mark Johnston
In the first of a week long feature mortgagerates.org.uk looks at the year ahead. The past few years has probably been some of the most turbulent times in the history of the financial services sector. Back in 2007 a culmination of easy credit fuelled a massive debt bubble that was brought about by both retail and commercial customers insane drive to buy property no matter the cost. Banks and building societies were falling over each other to offer loans to borrowers who had no real way of repaying them. Everyone was gambling on property prices continuing to soar. In a bid to cash in on borrowers thirst for property, lenders started to provide loans to people with poor credit ratings and a history of bad debt. This was the start of the sub prime market.
These mortgages were sold on the idea that if the borrower ran into financial difficulty, soaring property prices would give them (and the banks) enough equity to be able to re-mortgage or sell their home at a good profit. When the housing market started the slow and interest rates began to rise, borrowers could no longer afford their monthly repayments and defaulted on their loans.
The US was hit badly and lenders ended up with thousands of properties that they could sell let alone sell for enough to pay off the debts. Many UK lenders had invested in the sub prime market in the US as well as at home and ended up loosing billions in loan impairments. This sparked a credit crunch that saw lenders like Northern Rock almost collapse as savers tried to withdraw their funds. In a bid to save banks from collapse and restore confidence ion the UK, the government bailed out struggling instituions such as RBS, Northern Rock and Halifax.
2010 saw a new coalition government implement a tough spending review to plug the UK financial deficit as a result of the bank bailouts. These cuts together with tax and VAT rises will be felt in 2011. Because of this and the continued struggle by many Eurozone countries, current predictions are that the UK will recover slowly.
The biggest worry at the moment for UK home owners is the failing property market and the very real threat of interest rate increases. There has been a steady increase in inflation to 3.7%, almost double the governments target of 2%. There is no a lot of pressure on the Bank of England to try and reduce this with an interest rate increase but many experts believe that this would not only harm the UK’s recover but may cause a double dip recession.
Tomorrow we will be looking at the interest rate outlook for 2011 and how this is effecting the mortgage market and fixed rate loans.
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