What led to the Credit crunch 08?
- Low interest rates so people were borrowing more.
- Lenders relaxed criteria so people on low income/poor credit could take out a mortgage.
- When interest rates were increased to combat inflation, defaults rose and mortgage market went into default.
- Finance was hard to obtain and borrowing became difficult which led to a worldwide recession.
What is a ‘Subprime mortgage’?
Mortgages for those on low income or with poor credit history.
What is Securitisation?
When lenders packaged subprime mortgages into bundles with prime mortgages and then sold them to institutions over the world thus giving the lender more capital.
What 4 things influence the market?
- Interest rates
- Inflation
- Supply & Demand
- The Economy
High interest rates =
Lower house prices and demand for housing falls.
Low interest rates =
House prices rise and demand increases.
What are mortgage rates linked to and at what percentage?
The interbank rate & 0.1-0.2% higher than the BOEBR.
What is SONIA based on?
Actual interbank transactions.
What are the 4 influences on interest rates?
- Level of Government borrowing (high when they borrow more)
- High level of individual borrowing
- Monetary policy (can be risen to keep inflation low)
- Foreign interest rates (rates higher than abroad mean the pound is popular)
What is Inflation?
Increases in prices over a given time.
What percentage of inflation is considered healthy?
2%
High inflation =
Rates increase and property prices reduce.
Why would interest rates be reduced?
To encourage public spending with inflation now rising.
When does the UK economy have more consumer confidence?
When inflation is low.
What are the features of supply & demand?
More buyers than sellers, the price will be driven up. More sellers than buyers, the prices will come down.
What examples are there of Government action?
- The FTB exemption for SDLT
- Help to buy schemes
- 3% SDLT surcharge on people buying additional properties
Who supplies mortgage finance?
- Banks
- Building societies
- Specialist mortgage houses and challenger banks
Why are banks good for supplying mortgage finance?
- High returns and low risk, default rate is low.
- Cross selling opportunities
How much of business must a Building society devote to residential property?
75%
Who are challenger banks?
The likes of Metro, Atom, Aldermore etc and they get funding from the wholesale market.
Give features of Specialist Mortgage Houses?
- Often subsidiaries of larger institutions
- Funded from the wholesale market (money markets)
- Centralised basis (call centres)
What is a mortgage packager?
They operate between the lender and the intermediary and have a stronger understanding of underwriting requirements.
What is ‘Sale & Rent back’ scheme?
Where a borrower in difficulty sells their property to a company usually at below market value and rents the property of the company. Now regulated by the FCA.
What runs ahead of general inflation?
House price inflation.
