Mortgages Uncovered

Even if everything stabilized right now, the downturn looks worse than it had a few weeks ago.
Banking lending activity is essential for a good functioning economy.

Should the bank have less money to lend, or in fact have to do it on very expensive terms, it will restrain economic activity, much the same way it would if the Bank of England levered up its banking rate. Mortgage rates will start to go up.

Could my current employment position be in a precarious position?

Yes, potentially (and you don’t need to be an employee of HBOS, Lehman Brothers or Lloyds TSB to be affected).

With the current numbers at around one million of people who are unemployed it is at its highest level in 9 years and is at 5.5%. The number of redundancies have increased, and the number of people in work are dropping, large organizations are suffering with the crises and banks and estate agents are hit along with property developers, architects, the retail industry and the service industry with everyone cutting back their spend.

The unemployment trend is sadly, firmly on the up and will likely continue well until the economy does start to pick itself up again and people start to spend and invest again.

Savings

Well subject to you having less than £35K savings in any UK financial organization, you can’t lose even if the worst happens and your bank goes bankrupt. All due to the protection which is offered by Financial Services Compensation Scheme.

The only downside is that you may have to wait a while to get your money recovered.

The UK market differs from the United States in that there is no scheme in place to save a UK bank that is in trouble.

Either way, it would be prudent should you have more than £35K in savings with one financial organization, consider spreading it across a couple to cover yourself under the F.S. Compensation Scheme.

Will your mortgage increase?

Both yes and no.

Another thing that has risen in the recent week’s is the cost of borrowing and lending money between the banks themselves which means they are driving up the cost between themselves on the new fixed rate and various other mortgage deals (which has an impact on us).

HBOS’s sudden takeover by LloydsTSB means less competition in the market place of mortgage lending making it far easier for remaining mortgage lenders to charge more for loans and provide less interest to savings and bank accounts.

Therefore, it is the case that most mortgages will be higher than the Bank of England’s base rate.
However, another episode in a statement from the Bank of England who have now predicted rate of inflation would quickly hit 5%, before it will start to fall back.

Whenever the Bank of England become convinced of this happening it is quite likely it will cut rates to boost the economy and attempt to overcome the economic recession.

So wait a little, it’s coming and mortgages will get cheaper…but not just yet.

Literally every day has been one extraordinary development after another and every day we all stand back in astonishment at the next intriguing and concerning episode of ‘The Credit Crunch’ and the impacts it is having on business.

Lehman Brothers which as you know is the US investment bank has been allowed to go bust, however, at the same time AIG, one of the world’s biggest insurers was then bailed out.
A sudden and fast takeover in HBOS, the UK’s largest mortgage lender was then approved by the government.

Then the United States authorities started to make noises that it had cooked up a HUGE plan for relieving the United States banking system which was flailing in mortgage debts and their limits were put on a “short-selling” in shares in the United States and United Kingdom markets.

Then the share prices completely crashed and suddenly shot up again.

So is the average person now in a different position from all this activity?

Banks

Well, both UK and US governments including all financial authorities have been really concerned banks that are exposed to increasing numbers of defaulting mortgages will collapse.

This fear has in turn caused financial systems to completely seize up with further concerns that this would have a domino effect on banking systems globally which would also collapse.

This was the huge rush in getting HBOS to be taken over as soon as possible despite the bank itself and even the authorities pleading that the bank had plenty of money and would be fine.

Well with reference to Halifax Bank of Scotland’s it’s obvious what this is doing to the share price as it provides 20% of the total of the UK residential mortgage market which of course is currently the major vulnerability in the UK economy. So, if there is a sudden upturn in the amount of residential mortgages defaulting on their payments, Halifax Bank of Scotland would incur crippling losses that will impact particularly on buy to let, self-cert, and loans with an immediate high loan-to-value ratio.
However, Halifax Bank of Scotland has just raised £4bn in new capital helping to cushion the blow against the impact of this possibility.

It would appear that this move has come more from fear in the market which has also driven down the Halifax Bank of Scotland’s share prices. However, in all this, the short sellers will probably claim a modest victory by making the decision to lower their credit ratings in this current climate.

Halifax Bank of Scotland’s ratings do actually remain pretty strong, plus the rate cuts are likely not to lead to sharp increases in the cost of its finance or to a complete exodus of those responsible for providing their finance.

AIG is basically saying that it has now insured over $307bn of primary residential mortgages and corporate loans mostly from European banks. What has happened is that banks have bought insurance from AIG for protecting themselves against bad risk loans and defaults.

One of their primary motives in doing this was to reassure their regulatory authorities such as e.g. The Financial Services Authority for UK banks, that their loans are minimal risk in order that they could lend more that is now relative to their capital resources.

However, with AIG in trouble, sudden worries are raised about their ability to honour their financial commitments in their insurance contracts, known as ‘super senior credit default swaps’.

So, with the sudden downturn of AIG credit ratings the perceived risk now on bank’s loans insurance by them is now high!

So the associated bank’s who have insured with AIG are suffering from weaker balance sheets which means that their regulators will force them to raise additional capital.

The US Treasury and Federal Reserve cannot allow AIG to fail or following the immediate collapse of several banks a huge knock on effect that would produce a dangerous risk to the stability of the whole global financial system will ensue and things will really get critical on a massive scale.

Bank of America’s chief executive, Mr Ken Lewis said

“I don’t know of a major bank that doesn’t have some significant exposure to AIG.

The share prices of many banks have dropped due to the sudden shock that sent waves though the global markets, that AIG are now in a position where they need to raise literally billions in new capital to shore it back up.

So how has it exposed our banks?

Well, Sandy Chen of Panmure Gordon has shed some light on some insightful he has made and the following is part of the AIG United States regulatory filing:

“Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP’s super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.”

Tidy up your borrowing
It is not just mortgage debts that pray heavy on our economy, as a country, we have also built a huge £231 billion of non mortgage debts in store cards, personal loans, credit cards and over drafts.
The last thing you can afford at the moment is to be paying huge rates of interest for unauthorised borrowings so don’t overspend and start to tidy up your existing borrowing. If you transfer any card debts to a credit card offering zero percent balance transfers you could freeze interest in some cases up until January 2010.

Cut Insurance premiums
If you can get into the habit, you will be grateful of your vigilance if you annually automatically renewing all your insurance policies. Just think most businesses would do this so you should do this for yourself, it is good practice. It pays not to be lazy when your renewal notices arrive, don’t ignore them – get to an insurance comparison website and check the best prices for insurance for your contents, house, car, travel, and pets – all this adds up!

Save on Utility Bills
Shop around for the best prices on your gas and electricity and save even more money.

Increase your savings
By putting even a small amount of money away a month will start to add up and will become a good emergency fund for any eventuality. It is better to have a little money earning interest in

Well, we are now facing 2 immediate issues. The cost of credit is obviously rising and these mean a bigger dent in any of your loans, mortgages, credit cards and other borrowings. The second issue is that credit is not so available which means that it is really hard to borrow more money or in fact refinance your existing borrowings.

The financial market now fuelled by bad debt and missed payments is on its next leg which is still downwards. It’s now the time to start battening down the hatches with your finances.

Budgeting
Start building a foundation that is strong for your personal finances. The ones now at risk are the people who are most at risk are the ones that have been lulled into a false sense of security by a once thriving financial market eager to lend money. These people may have been enjoying a slightly more luxurious lifestyle by living beyond their means for a while. Now you are paying more for this luxury and this has an impact on your monthly budget. Get clever and look to cutting back where you can.

Re-mortgage where possible
With over 11.8 million mortgages in the UK market nearly 50% of households are now carrying hefty interest charges, our total mortgage bills is around £1,218 billion and interest exceeds £6 billion a month for us all collectively.

You can still look at minimizing your interest and fees by looking at better deals on the market. By remortgaging and trimming your monthly payments down you could save yourself a lot of money so check out any no-fee mortgage services available and get some idea of mortgages available to you.

Mervyn King, Bank of England Governor will be announcing his new liquidating scheme for boosting mortgage market next week.

Last week, Bank of England launched a brand new scheme that allows our banks to temporarily swap (temporarily), their higher quality mortgages and some other securities for the UK Treasury Bills.
Now that the markets relating to many of these securities are currently shut, the banks have now got overhand on their balance sheets and they are stuck with assets that they can’t sell as security to raise more funds.

The financial situation has been such that bank’s are too stretched by the assets that cannot sell so therefore, have been very reluctant to make any new loans to the public and even to each other.
Under the new government scheme, it will now mean that banks will be able for a limited period, swap illiquid assets of high enough quality for the Treasury Bills. The responsibility of their loans will still stay with the banks.

The aim of the scheme is to boost the liquidity position of the banking system which in turn is expected to increase far more confidence into the financial markets.

Mr. King stated that this was a short term measure but would help make available further finance for banks and their mortgages.

Finally, the good news in flowing in and with the Nationwide and The Co-operative Bank both cutting their mortgage rates it means further good news for some amongst the recent struggles.

Nationwide has cut the interest on certain mortgages which include some of its’ fixed rate and tracker loans which has meant a cut of nearly up to 0.3%.

Also, Nationwide introduced a brand new 2 year fixed rate mortgage loan, available from a mere 5.58% and with a standard arrangement fee of £999.

The Building Society now says it is also waiving some of the original reservation fees for a limited time only; however, this is a deal saved for only existing borrowers who may be looking to switch their mortgage deal arrangement with the Nationwide.

The reservation fee was on the lender’s 5 year fixed rate and 2 year tracker mortgage products and is now rising from £1,499 to a £1,999.

All Nationwide customers who are due a mortgage interview (in a branch or even over the phone) and before 30th September 2008 will also be entered into a free prize draw and the ten winners will get £10,000 in mortgage payments paid by the Nationwide for a full year.

Then, Co-operative Bank announced on that from 15th September, it was now slashing the cost of its’ 3 and 5 year fixed rate mortgage products for borrowers who have a 25% deposit, by 0.3% and 0.7%.