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It has been another uncertain month for mortgage borrowers, as UK banks continue to apply stricter lending criteria in the wake of the credit crunch. However, the Bank of England’s recent decision to inject £50bn into the UK’s financial system may yet help ailing banks that are threatened with liquidity problems stemming from reduced interbank lending. Chancellor Alastair Darling has also called on lenders to help struggling borrowers, particularly those in fear that their homes may be repossessed if conditions continue or worsen. Despite such efforts, many analysts think that it will take some time yet before mortgage borrowers see any real reprieve in the market, with some warning of more difficult financial times ahead.

The domino effect: Why the credit crunch is affecting property prices

The credit crunch of late 2007, which stemmed from the collapse of the US sub-prime mortgage market, continues to impact global financial markets. In particular, banks have become increasingly wary of lending to each other, which has increased the interbank lending rate (the Libor). With banks finding it harder to secure funds, they have looked to bolster their liquidity and reduce their risks by toughening up their lending terms to consumers. This has made it more difficult for both first-time buyers and those renewing their mortgages to get favourable deals, despite lower Bank of England interest rates. This in turn has had a knock-on effect on the housing market, causing a property slowdown that some are predicting will only get worse through 2008 to 2009.

How the Bank of England hopes to help

The Bank of England’s £50bn scheme to support banks is the latest attempt to ease such problems filtering through the market. The cash is not being given directly to banks – instead, the banks can swap their riskier mortgage-backed assets for government bonds, although they have to pay a fee, taking a discount of between 10% and 30% on the assets they swap.

It is hoped that the funds will not only improve bank liquidity, but will also restore confidence in the money markets, a vital step if the economy is to recover quickly. The move may also have come at a good time. Recent figures from the Council of Mortgage Lenders showed that the number of UK homes repossessed last year rose by 21%, the highest for eight years. The increase, however, was not as great as had been expected and, with a repossession rate of 0.23% for the year, there were still less than half the repossessions experienced throughout the first half of the 1990s. Although the market remains uncertain, it is hoped that such moves made at this crucial time by the Bank of England may yet avert the potential threat of recession.

What it means for you

If you are looking to buy your first property or you are already on the housing market and are perhaps due to renew your mortgage, there is no doubt that these are difficult times. Earlier this year, lenders unanimously decided to pull the plug on 125% mortgage deals, with many also cutting 100% deals and increasing rates for those with only small deposits. Despite a helping hand from the Bank of England, it is unlikely that conditions will substantially ease for borrowers any time soon, as the impact of any financial support will take time to reach the consumer market.

However, there are some more hopeful signs. Apart from financial support from the Bank of England, there is also some hope that the current price surge across commodities, food and oil may ease later this year – which would be a huge relieve for households that have been facing significant increases in their household shopping expenditure. In addition, interest rates are likely to further fall; although the full effect of such cuts may take time to move through the system, they should eventually improve conditions by stimulating the marketplace, which in turn will allow the banks to reintroduce more favourable rates to borrowers.

While we wait to see the impact of Bank of England efforts, the future for the housing market remains uncertain, although not altogether bleak. It is certainly still a case of riding out the storm, but with the hope of clearer skies ahead.