In the years since the financial crisis, there have been numerous changes in the banking and mortgage industries in the UK, presumably to lessen the risk of another similar catastrophe. But certain alarming financial trends, such as a surge in consumer debt over the past few years, have prompted many to wonder if we’re headed for another crisis after all. And a recent development in the home mortgage industry is raising fears that we’re headed for 2007 all over again… or worse. Are these fears justified?
With the continued improvement in the financial scene, along with rising employment, memories of the 2007 financial crisis seem like distant memories or bad dreams to a lot of people. The downside to all this good news is that personal debt has been increasing by leaps and bounds as consumers’ memories fade and they continue to feel ever more confident. Some experts, however, see the continuing debt uptick as a worrying trend. In January of 2016, for example, personal debt in reached an historic level of over £180 billion. and over the last three years, the StepChange charity has fielded over 750,000 calls for assistance and advice. To all outward appearances, the confidence that so many Britons feel might be ill-founded, as those experts warn that the UK is literally drowning in debt.
But experts can sometimes be prone to sounding the alarm bells early, since they know how slowly people tend to respond to warnings. One might correctly counter that debt in and of itself can be a marker of a recovering economy. And there is always the chance that individual consumers will heed the warnings and begin to manage their debts and other financial affairs responsibly and avert another crisis.
Unfortunately, there is one area of consumer debt that has experts particularly concerned, eliciting disturbing visions of another mortgage crisis.
The return of the “zero-deposit mortgage”: is Barclays opening up a can of worms?
For the first time since the financial crisis began in 2007, a major bank – Barclay’s – is offering some home buyers mortgages amounting to 100 percent of the price of the home, and has, in some cases, raised the amount some buyers can borrow from the standard maximum 5 times annual income to 5.5 times for some existing customers. It is understandable that this would cause some economists more than a little concern, since the primary driving factor in the crisis was the bursting of the housing bubble, when defaults on years of risky loans collided with a market correction in the previously skyrocketing home values. Literally millions of homeowners were left unemployed as the ripples of the recession forced businesses to cut back, and many of those homeowners defaulted on their mortgages and lost homes whose value was significantly less than the amount still owed.
There are a few stipulations on qualifying for such loans beyond the cap on the amount, however. The application process includes a stringent test to determine that the buyer can afford to make the payments without undue hardship. In addition, in order to qualify for the loans, the buyer’s parents must place a deposit equivalent to ten percent of the selling price in a linked account where it will earn roughly one third less than the 2.9 percent interest rate on the mortgage. These “family springboard” stipulations will likely limit such mortgages to families of at least modest wealth, but should history repeat itself and the housing market undergo yet another correction, a repeat of the 2007 collapse or even worse could occur.
Some have said that these “family springboard” mortgages might offer a reprieve for the “Bank of Mum and Dad”, where many young people have had to rely upon parents to finance their mortgages in the absence of savings and available financing and the prevalence of stratospheric house prices. While the Bank of Mum and Dad takes some of the pressure off the children, it moves that pressure back to the parents, who might be concerned about having enough left in their own savings pot to survive comfortably, especially if for some reason the child is left unable to keep up with the payments. At least with the new Barclay’s 100 percent mortgages, the parents’ actual contribution would be limited to ten percent of the house price, and only for three years, after which time they could retrieve the money from their linked account.
Despite the understandable concerns raised by the “family springboard” mortgage, which some fear is a return to the days of high-risk home loans, it is quite different from those old mortgage deals. For one thing, the stringent affordability qualification is a potentially effective hedge against the temptation to buy a house that is clearly beyond the buyer’s means. Furthermore, the parents’ 10 per cent in a special savings account really makes these 90 per cent mortgages. These stipulations alone differentiate the zero-deposit mortgages from the kind of slipshod lending practices that caused the last financial crisis.
The real answer to the question of whether we’re headed for another financial meltdown is that it could go either way. It would be nice to think that we’ve learnt from our mistakes, but human history is replete with examples of the same mistakes being made over and over again. One point is certain: we can’t rely upon government regulations or consumer advocacy organisations to save us from ourselves. At some point we each must take responsibility for our own financial well being, and the first step is to educate ourselves so that we can make the best choices in our own financial dealings, and pressure our elected officials to do the same in their regulatory actions.