Lenders set to tighten their belts further

Posted in 'Credit Crunch' by Barry Stamp

15 January 2008

Consumers are advised to take much more care when applying for credit in 2008, if they wish to avoid being declined. Increasingly lenders are tightening up their lending policies and are becoming more selective.

The actions of lenders reflect various forecasts warning of greater levels of insolvency and defaults over the coming year. One, from accountants KMPG, predicts that insolvencies will rise by 19% this year, despite a recent reduction in bank base rate and the promise of further cuts to the relatively low base rate that we already enjoy in the UK.

Many mortgage payers are facing higher monthly repayments as their fixed rate periods come to an end. There are reported fears that this will be unmanageable for many, though the actual rises pale into insignificance compared to the step rises in mortgage rates we have witnessed in the past. For instance, on ‘Black Wednesday’ (16 July 1992), interest rates were increased from 10% to 12%, then to 15%, and back to 12%, all in a single day.

If you are worried about how to manage the expiry of a fixed rate term, there are several options available to you including:

• getting a new fixed rate from your existing lender. Ask what rates are available and take time to study them carefully before choosing which one suits you best. Some may require a fee to access the new fixed rate, which may either be paid or added to the mortgage. It’s a relatively simple calculation to see whether the fee is worth it, but try to avoid adding the fee to your mortgage if you possibly can.



• changing your mortgage from a repayment mortgage (also known as a capital and interest or annuity mortgage) to an interest-only one. However you’ll still need to make sure you have some way of paying the capital back at the end of your mortgage term, so you’ll need advice from a mortgage advisor here.



• re-mortgage and taking advantage of a new fixed rate and introductory offers. We recommend the use of an expert in current market conditions, such as this specialist broker.
  
  You should aim for a deal that will actually decrease your current monthly repayment and which also gives you the security of a new fixed interest rate.

Although many commentators point to the ‘sub-prime’ mortgage crisis in the USA as the reason for caution by UK lenders, it’s unlikely to be the main one. Whilst it is true that the cost of money has increased for ‘sub-prime’ lenders, those costs are usually absorbed by sub-prime lenders by simply passing on the increase to sub-prime borrowers.

The adjustment of lending policy by UK lenders in the mainstream consumer market is a continuous process. Lenders monitor levels of ‘delinquency’ very carefully and are able to predict bad debt rates and loss rates with some accuracy and for some time ahead.

If a lender finds that its current portfolio of loans or credit cards is not likely to perform as well as it expected it to, then it simply tightens up its policy for new business. It can even take an aggressive pricing approach to obtain higher quality business, so that new customers improve the overall risk position. The only trouble is, the decline rate will increase to as high as 85%-90% of all applications.

Even before the ‘credit crunch’ credit card lenders were declining between 65%- 70% of all new applications. This is mostly because consumers tend to chase the cheap deals that are not aimed at them, but instead are aimed at a very low risk clientele.

At checkmyfile, we continuously monitor the cut off scores of lenders, so we can present to you a list of credit card, personal loan and mortgage lenders who are most likely to say yes. This means that you can increase your chances of being accepted by finding out which lenders are matched to your credit score just by using our free service. Click here to calculate your score, and to see lenders matched to you. There’s no guarantee of course, but your chances of being approved are significantly increased, especially in the current credit crunch.

If you are looking for unsecured loan finance, which can often be cheaper than a further mortgage advance, and which is also much quicker to obtain, there are still a small handful of competitive deals to be had on personal loans – Alliance & Leicester offers one of the best deals available anywhere, with a typical APR of 7.8%. Backed by Santander, they’re a reliable and responsible lender. For those with a good or excellent credit rating, Zopa can be a good alternative with rates from 8.6% for larger loans of up to £15,000.

For most people, the cheapest source of loan finance at the moment is available from the Post Office. You need to apply for the Post Office credit card, then use the card to purchase goods or services up to £2,000, then you can switch that to a loan at a market beating 6.6%.