How the credit crunch will affect homeowners

It's currently impossible for a day to go past without hearing about the credit crunch. But while we all know that it is causing trouble for the world's banks and stockmarkets, what does it mean for homeowners? Here we look at what the current financial upheaval means for everyone already on or trying to get on the property ladder.

First-time buyers

Writing in The Sunday Times this week, landlady and columnist Rosie Millard bemoans mollycoddling' of first-time buyers (FTBs). FTBs "must and I stress must be treated with as much care and solace as ickle baby bluetits that have just fallen out of the nest". In fact, she complains, they are "free spirits for whom a house-price wobble is only ever going to be good, since they will never be in negative equity".

Her envious tone speaks volumes about how worried property investors are. While the Bank of England has cut the base interest rate, mortgage lenders have been unable to follow suit. Put simply, the credit crunch has resulted in banks being unable to borrow money as cheaply, or in the same quantities, as they once did because lenders (mainly other banks) are worried about their creditworthiness. That in turn has meant that they have fewer loans to offer the consumer and charge higher prices for those that are available.

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This isn't just happening in theory the evidence is everywhere around you. Research for The Independent on Sunday showed that of 15,000 mortgage products available last summer, just 5,000 are left. And conditions on the ones that are still out there are much stricter. "In an echo of a bygone era, some building societies, including the Newbury, Melton Mowbray and Tipton, have said that from now on they will lend only to local people," says the paper. Gone too are the days of the 100% mortgage. Now you need a hefty deposit 10% minimum and even then the interest rate will be higher than in the past. So any would-be FTBs are going to find it tough to get a mortgage now.

But the flipside is that so will everybody else. And with the cheap money propping up the housing market now gone, house prices will continue to fall, so potential FTBs need not worry about getting on the ladder just yet. Simply stay out of the market and start saving a deposit for when prices eventually stop falling. After all, savings rates are rising too as banks frantically try to attract deposits.

Buy-to-let investors

If you are a regular reader and still own buy-to-let properties, there is clearly nothing we can say to convince you of the error of your ways. But if you are getting nervous then it is definitely time to sell no matter what you hear. The Mail on Sunday tried to paint a rosy picture for buy-to-let investors recently. "Experts agree that although existing investors are likely to see the value of their property portfolios fall this year, bad news on prices should be offset by good news on rents," says Neil Simpson. What he fails to mention is that rising mortgage costs mean that even if rental rates rise, they are highly unlikely to catch up with your monthly outgoings.

Add to this the fact that mortgage lenders are growing ever more wary of buy-to-let investors, and the picture is looking increasingly grim. The reason for this wariness is the fact that the falling market has made it apparent that a lot of new-build properties, many of which were snapped up by buy-to-let investors, were grossly overvalued.

The Guardian reports that one investor who paid £236,500 for a two-bedroom flat in Manchester's city centre a full three years ago is now seeing his flat auctioned off at a guide price of £100,000 after being repossessed. Similar tales are cropping up all over the country. So get out before prices fall any further.

Homeowners with mortgages

Forget stocks and shares the best investment you can make right now is to pay off a chunk of your mortgage (see The banking crisis: is it all doom and gloom? for more). Rising mortgage rates and an uncertain stockmarket mean that in all likelihood one of the best returns you'll see is to pay off as much of your debt as you can, especially if your current mortgage deal is close to coming up for renewal.

"Hundreds of thousands of the most credit-worthy homeowners coming to the end of fixed-rate deals next month will have to pay thousands of pounds a year extra for a similar deal," warn James Charles and Grainne Gilmore in The Times. This is where homeowners will really see the teeth of the credit crunch. Not only have interest rates risen, but arrangement fees are also far higher than just a couple of years ago. The average arrangement fee is now "about £1,000", Melanie Bien of Savills tells The Daily Telegraph.

The other problem is that just as mortgage lenders are growing fussy about doling out new mortgages, remortgaging too is becoming more difficult. Those unfortunates who find themselves with a mortgage larger than their home's value, perhaps because a bank loaned them 100% during the good times, will find that getting any similar deal now is impossible.

Meanwhile, anyone with a "patchy credit history", which up until the middle of last year was no real obstacle to a cheap loan, will also now "find it very difficult to get" a decent rate, says The Independent. That suggests a lot more misery ahead for any homeowners already feeling stretched.

Homeowners without mortgages

This is the holy grail for all homeowners, the top rung of the property ladder. So sit back, relax and feel free to be a little bit smug but only in earshot of your fellow mortgage-free homeowners. Obviously, the value of your house will probably drop over the next 12 months, but who cares? Any other house you eventually want to buy will become cheaper too and you won't have to pay as much stamp duty either.