Is Britain facing a second credit crunch?

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by: bythesea
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Date: Fri, 13 Aug 2010 Time: 8:40 AM
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After three years of financial stress, beleaguered Brits could be forgiven for thinking that the worst of the economic crisis has passed. However, indications are that there could yet be more pain on the way for families across the country.

In a survey published by the Bank of England at the start of this month, lenders warned that mortgage borrowing could well become even harder to obtain in the coming three months. This, said the banks, will be due to tighter conditions for wholesale lenders - the institutions that high street banks borrow from.

This has highlighted already existing concerns that Britain might well be facing a second credit crunch. That prospect will bring a shudder to the spine of anyone who struggled to get hold of a mortgage in 2008, when the availability of secured credit tumbled to an all-time low.

While lending conditions may have improved slightly since then, Bank of England figures show that mortgage approvals are still at around half the numbers seen immediately before the crisis hit.

Indeed, the picture is looking increasingly grim for those attempting to buy their first home. The Council of Mortgage Lenders said only 35 per cent of all mortgages lent in April went to first-time buyers - the lowest proportion since September 2007. This figure may well fall further if the availability of credit does tighten yet again in the coming months.

Plan ahead

So if you think you may need to take out a mortgage in the next year or so, what is the best plan of action?
With the prospect of further difficult times to come, Martin Bamford, chartered financial planner and managing director of Informed Choice, believes it's important to do all you can to prepare.

"Look at your plans for the next year and consider the financing you might need," he says. "If you are going to need to borrow or refinance later this year, it might make sense to do it now before lenders start to restrict access to borrowing even further in the coming months."

On the property market, Bamford argues that more restrictive lending practices are likely to lead to a drop in purchases. "This will result in homeowners seeing recent property price increases slowing down or even declining again," he says. This is broadly in line with recent predictions from Halifax and the Royal Institution of Chartered Surveyors, which both expect house prices to deflate over the rest of the year.

Whether you call this another credit crunch, or simply an extended hangover from the financial crisis, the next year looks like being another tough one for homeowners and first-time buyers. But what might the knock-on effects be elsewhere?

Charles Davis, managing economist at the Centre for Economics and Business Research, says that restricted lending and falling demand in the housing market will "hold back a large chunk of economic activity" - meaning yet further losses of jobs on the horizon.

A silver lining?

In all the gloom, however, there might be something of a silver lining. Davis predicts that the base rate will remain at its current record low of 0.5 per cent "until at least 2011, possibly even 2012" to counteract the tough measures announced in the recent emergency Budget.

This would spell good news for those who are on variable rate mortgages - and on top of that there might even be some hope at long last for savers.

Low rates are certainly nothing for savers to shout about. How there are suggestions that, should money become tight, banks may be forced to raise the returns they offer - in the form of savings accounts - in order to get their funding from consumers rather than wholesale lenders.

On top of that, Davis says that the current high level of inflation is unlikely to last long, as it is driven by what he believes are temporary factors. As a result, it may not be all that long until it once again pays to put your money away.

In the meantime, though, Bamford says there's little that savers can do but wait and try to shop around for the most competitive rate.

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