Bridging

David Kuo, head of personal finance at the Motley Fool, took time to explain that the link between the interest rate set at the Bank of England and the interest rate set by mortgage companies is not iron-clad. He explained that while many consumers eagerly awaited the expected interest rate cut by the Bank of England, these consumers may not necessarily feel the reprieve in their own mortgage payments, as mortgage lenders can decide whether or not to pass on the lower rate to their customers.

Unfortunately for many customers, he explained, mortgage companies are currently focusing on “rebuilding their battered businesses,” (referring to the negative impact the mortgage crisis had on many lenders).

Although many experts expect the Bank of England to continue cutting the interest rate in an attempt to kindle the British economy, most experts still expect the rate of personal insolvencies to greatly increase for the 2008 year.

With the recent news hype regarding mortgage disasters, many people may be wondering if they will have a problem receiving a mortgage. Andy Pratt, spokesperson for Alexander Hall, reassures the public that the crisis has been relatively concentrated to the sub prime sector, leaving the mainstream lenders unaffected for the most part. Mr. Pratt asserted that people with good credit history should not worry about being rejected from a mortgage application. 

“Self-cert mortgage,” for those not in the know, refers to receiving a mortgage based on your own confirmation of income, without the need for independent verification. Many self-employed people decide to go with a self-cert mortgage, as do those who have multiple income sources or an irregular income. In fact, according to the Economic and Social Research Council, 13% of all employed Britons are self-employed.

When asked about the affect the mortgage crisis has had on this sector, Mr. Pratt responded that it too is essentially unchanged, and that those who have sought a self-cert mortgage have been able to receive them.

Mortgage problems abound. A study completed by the Bank of England in September, 2007 found that nearly one million home-owning families were struggling to make their mortgage payments, and an additional 1.8 million stated they were struggling ‘at least occasionally.’ The situation for renters (who typically have lower incomes than homeowners) is even gloomier, with about 28% responding that they had trouble paying their debts ‘at least occasionally.’ With September merely the tip of the financial crisis iceberg, circumstances have become worse since the study took place.

Two factors leading to suffering amongst Britons include increasing interest rates for mortgages, which figures show have increased homeowners’ yearly mortgage payments by a total of £3.6 billion in the last year alone, and institutions tightening their lending practices, making receiving credit much more difficult.

Experts warn that this trend could result in an extremely higher rate of declared bankruptcy over the next two years, as well as a downturn in the property market and broader economy. Already, families are outwardly showing their struggle: In order to make their increasing mortgage payments, many report that they have reduced their spending; 10% have been forced to borrow more money or extend their mortgages; and another 10% have taken on a second job or decided to work overtime.

Despite the dramatic figures witnessed in recent studies, Chief economic adviser of The Confederation of British Industry said that the fundamentals of the economy remain sound and hype regarding a full-blown recession is exaggerated.