Falling house prices endanger loans

Posted 2007-12-2

The recent crises of Northern Rock mortgage lender and US sub-prime lending are among the reasons why UK property prices are expected to drop by an estimated 6% over the next two years. In September of 2007, Northern Rock stated that its profits for the year would be hit, but that it would remain solvent with an estimated £113bn in assets. 

Unlike most banks, which obtain their funds from customers making deposits into accounts, Northern Rock is dependent mostly on its mortgage business. It raises most of the money which it lends for mortgages by borrowing from banks and other financial institutions. 

But as house prices decrease, homeowners could see lenders less willing to provide high income multiple mortgages or loans for a large percentage of their property’s value. 

For 2008 and 2009 the Capital Economics’ Housing Market Focus anticipates an expected annual decrease of housing value by 3% each year. As prices of homes decrease, the amount homeowners could obtain via home loans is expected to diminish. 

“Up to one-fifth of borrowers might see some reduction in their purchasing power, with knock-on effects on house prices,” commented Roger Bootle, editor of the study by Capital Economics. The same study foresees a variable 5% drop in the base rate of interest which could lower the monthly repayments on a secured home loan. Property owners are encouraged to use the current window of opportunity to obtain a secure home loan before decreasing housing prices reduce loan amounts.

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