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The chances are if you’re an aspiring first time buyer, you’ve never even heard of mortgage 'rationing'. That’s because the last decade and more have seen banks and building societies bending over backwards to lend money, rather than check whether buyers have the means of repaying the vast sums they’ve been borrowing.
Whilst the housing market boomed, that wasn’t a problem as both banks and borrowers thought the rising cost of property would ensure no-one would lose out.
In essence they forgot (or at least decided to ignore) the maxim that whatever goes up, must come down. And that’s what caused the credit crunch.
Banks face huge repayments to Government
Sure, all the talk lately has been about renewed confidence in the housing market thanks to plummeting mortgage rates. But two essential elements have been missed out - the need for the banks to repay the billions they borrowed from the government following the credit crunch, plus the banks’ wariness about getting caught out again by lending too much again in the future.
Then there’s a further problem that when the banks do repay the money they borrowed from the taxpayer, they will no longer have the money to lend to first time buyers even if they wanted to.
It’s this growing worry about where the money’s going to come from that is producing increasing noise about whether we will see a mortgage drought.
It's happened before...
Such a drought wouldn’t be unprecedented. Though not many of us will remember, successfully applying for a mortgage in the 1970s was no easy matter. Lenders would carefully examine credit ratings, employment history and earnings before granting a mortgage.
That sort of behaviour might be responsible, but with so much irresponsible lending since then, banks are desperately trying to keep the merry-go-round of rising house prices and easy mortgages, spinning.
Dire consequences
If they fail, the consequences could be dire for both those wanting to get on the housing ladder and for those who already have their life savings tied up in property.
The Council of Mortgage Lenders has warned of a £300 billion gap in funding emerging between 2011 and 2014 as the banks are forced to repay the money they borrowed during the credit crunch.
Although they don’t spell it out, their worries are clear. Unless they get more money to lend, first time buyers – often called the “lifeblood” of the market – will disappear. This will lead to a collapse in house prices, negative equity, and repossessions – all at a time when the economy is struggling to survive and salaries are frozen.
That’s a terrible picture to contemplate.
But so far the Bank of England is sticking to its guns and demanding repayment of the Special Liquidity Scheme that provided lenders with £178 billion of cheap cash, along with a further £134 billion lent through the Credit Guarantee Scheme. And it wants this money back by 2012 or 2014 at the latest.
That might seem some way off to some. But if you were a banker lending mortgages on a 25-year repayment term, you wouldn’t think so.
In a way, the Bank of England has to talk tough. If it doesn’t, then foreign investors who buy Britain’s debts in the form of bonds, or gilts, will worry that the UK will never be able to repay its debts and will pull out or demand greater rewards for their risk, pushing up interest rates.
So which way will it go?
The Council of Mortgage Lenders accepts the money will have to be repaid but its spokesman Bob Thomas, said he wants this done slowly and smoothly. "We're not suggesting that the government pours vodka in the punchbowl", he said. "We are asking how the government can get the patient to sober up without too much shock therapy."
The chances are this is what will be attempted. There will be a muddling through, where the banks will be forced to pay some of the money back on schedule. The idea will be to do just enough to keep foreign investors confident Britain won’t go bust while allowing the High Street banks to keep some cash to lend as mortgages.
There are no guarantees this will happen. But what seems inevitable is that the temporary flood of cash injected into the banks - which has convinced many that everything’s back to normal - is going to dry up to a certain extent.
That means mortgages are going to become harder to get hold of, as well as more expensive.
What does that mean for you if you are a first time buyer or self-employed?
Well, if you are employed at the moment but have plans be become self-employed, now might be the time to get a mortgage while you still can.
If you are a first-time buyer, without a significant deposit, perhaps the best approach will be to forget about getting a mortgage right now and start saving as much as you can. If interest rates do rise, then hopefully your money will start growing too, just as house prices start getting a beating.
As we’ve recently seen, mortgages without a significant deposit are already difficult, if not impossible, to get hold of and very expensive even if you can.
The Bank of England governor, Mervyn King has spelled out that households face an unprecedented period of 'belt-tightening'. The best thing we can do as individuals is to prepare as best we can for when things hopefully stabilise and better opportunities start to emerge. Unfortunately, this might not be for a number of years to come.
