The Credit Crunch 10 Years On: What’s Changed?

Posted by Jamie Mackenzie Smith in Personal Finance on 26 September 2018

For many people, especially the those lucky enough to not have been old enough to be directly affected, the economic downturn of 2007-2009 seems like a distant memory. The first iPhone had launched a mere two months before the recession hit, and since then they’ve rebooted the Spiderman film franchise not once, but twice. But more importantly, has enough time passed for the borrowing/lending market to revert to its old tricks?

It is largely accepted that ‘reckless’ lending played the leading role in triggering events: mortgages were far too easily obtained and the price of property sky-rocketed to the point where many people were getting accepted for mortgages that they simply couldn’t afford.

Have lenders learned from these mistakes, or have we slowly been inching back to the position we were in 10 years ago?

How have mortgages changed?

While the housing market wasn’t solely to blame for the recession, in the UK at least it was culpable for much of the disruption that ensued.

Ever-rising house prices and a shortage of affordable homes. Sound familiar? On the face of it, it looks like very little has changed, but a lot has changed behind the scenes. There are more stringent checks in place to make sure mortgages are actually affordable to the borrower, and 100% LTV mortgages are a thing of the past (for now at least). FCA regulations have also meant that the borrower is made better-aware of what they’re letting themselves in for and the implications of over-extending.

According to Rightmove, the average cost of a house nationwide in August 2018 was £301,000, up from £164,000 just five years beforehand - a jump that doesn’t reflect an increase in wages, which decreased between 2018 and 2008 according to the Institute for Fiscal Studies.

2008

2018

BoE Base Rate

5%

0.75%

Typical Mortgage Interest Rate

6.64%

2%

Average House Price

£164,000

£301,000

Average Monthly Mortgage Payment (over 25-year period)

£1,122

£1,276

% Of Mortgages in Arrears*

2.72%

0.93%

*Balances in arrears of 1.5% or more of the outstanding balance


As the above comparison shows, a lot has changed for anyone thinking of taking out a mortgage – BoE Base Rate and the typical APR of a mortgage are much lower than they were, but the average cost of a house has almost doubled. With that, the average delinquency rate on a mortgage has dropped to almost a third of what it was in 2008, so even though the average price of a house has almost doubled, payments are more likely to be made on time.

One of the many casualties of the recession is the glacial movements in the UK’s average annual salary, which, while marginally higher than 10 years ago in some areas, doesn’t go far enough to cover the increase in costs related to goods and services, let alone that of a house. That’s where government-backed schemes such as Help to Buy come in, allowing potential buyers to save smaller amounts for a deposit, but owning a smaller portion of the house itself while paying what is effectively rent to the government.

Current Mortgage Deals

Some mortgage providers are still willing to loan a 95% LTV on a £600,000 property, up to the value of 5.5x the applicant’s income. This is similar to the types of deal being offered before the recession hit, though most banks would only offer a 75% LTV back then. The solution offered by Clydesdale Bank is to only offer this mortgage to newly-qualified professionals in certain vocations, ones which presumably they have deemed most ‘secure’ in terms of income and job stability.

New checks and ‘stress testing’

Wiser after the event perhaps, 'stress tests' were imposed on lenders in an attempt to make sure that homeowners are not borrowing more than they can afford – not just today but in the future. In short, these are used to gauge whether a change to your regular monthly outgoings would cause difficulties in making mortgage payments.

According to the Bank of England, the 2018 stress tests carried out imagine how your repayments would be affected following:

  • Global and UK recessions (resulting in a drop in UK GDP by 4.7%)
  • Higher interest rates with a 4% BoE Base Rate
  • A 33% drop in UK house prices

While this seems like a bit of a ‘perfect storm’ in terms of possibilities, the idea behind it is to make sure that people don’t start defaulting on payments en-masse should it ever come to fruition.

Arguably the most likely of those events is an increase in Base Rate, which has started to creep up over the past year – driven in part by a need to recover from an unsustainable low point. That means anyone that takes out a mortgage at a fixed rate introductory offer will face a more pressing requirement to re-mortgage in a few years’ time when the fixed term ends and monthly payments increase.

Is it harder to take out a mortgage now?

What this means in real terms is that while it might be harder to get accepted for a loan that could put a strain on the applicant’s finances, they should have no problem getting accepted for a mortgage that’s within the reach of their current affordability. Regulations introduced as a result of the recession are not designed to make it harder to get a mortgage, but instead make sure that no one is granted a mortgage they can’t afford.

In short, mortgage lending isn’t a bad thing – quite the opposite in fact – but it’s important that loans are sustainable and responsible.

The number of mortgage applications has dropped following the news of a rate increase, which means it might not be long before we start to see mortgage lenders making the criteria for borrowing that bit more lenient in an attempt to gain more customers.

Changes to savings

The rising interest rates are likely to be music to the ears of savers (albeit rates are still nothing to shout about), who have borne the brunt of the low interest rates for the best part of a decade. Decent savings rates could still be some way off yet, with lenders routinely increasing savings rates long after mortgage rates have gone up.

How lending in general has changed

Much has been shaken up in the financial market in the last 10 years, least of all the way that lending is regulated as a direct result of the recession itself. There’s an ongoing battle to make it easier to borrow money, while still making sure that people can actually afford the loans they’re taking out.

Take guarantor and payday loans as an example. By design these loans are easy to take out, regardless of what the applicant’s Credit Report looks like or the state of their finances. The cost of this however comes in the form of a ridiculously high APR, to supposedly cover the increased risk of specialising in the sub-prime market loans and having a minimal acceptance criteria.

In 2013 new regulations were imposed on payday lenders making the service more transparent and the sign-up requirements more stringent in an attempt to protect those most financially vulnerable from getting into further debt.

According to the CMA, by 2017 this lead to a 42% reduction in the number of payday loans being taken out.

A new generation of borrowers

People born in the year 2000 will this year be able to take out credit for the first time, but will they want to? Numerous outlets in the past have commented on the troubled relationship between Millennials and credit, but according to some, the term ‘Millennial’ only applies to people born between the early ‘80s and early ‘00s, which means they will be among the first to be part of this new, as yet unnamed generation.

It remains to be seen how this new generation will view the world of borrowing and finance; it’s likely that the next ‘revolution’ in terms of borrowing will be made for (and quite probably by) them. If nothing else, the process of applying for finance is likely to get more interconnected – try explaining the process of submitting mortgage paperwork to a generation that’s never known a time before the internet and you’ll soon see why a small number of lenders have introduced ‘paperless’ mortgage applications.

Recent studies have also shown 16-18 year olds drink less, are more sensible and place “significant value on responsibility on maturity” which sounds like a definite departure from their Millennial forebearers. Will this new wave of stability extend to finances as well? It seems likely. But that sensible nature will still require a good credit history if indeed the next generation wants to be more creditworthy than Millennials.

Are we headed for another recession?

That entirely depends on who you ask. Yes, business seems to slowly be returning to how it was before the recession following 10 years of recovery. Yes, it’s possible that the same mistakes will be made, but so soon after the seismic events that caused the last one, lenders in particular will want to be cautious about anything that could lead to additional regulations being applied to their day-to-day lending and new regulations make it much harder to make the same mistakes twice.

In terms of what’s likely to be the next big shift in the UK’s economy, the deadline for Brexit is just around the corner and whether it ends up being for better or for worse, the impact is likely to be felt for a while to come.

But it shouldn’t be ruled out entirely, since wherever complacency goes, disaster often follows.

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