One of the lessons of the credit crunch and the sub-prime mortgage market has been the importance of ensuring that borrowers fully understand the nature of the loan transaction.
Lenders have learned, perhaps belatedly, that they need to carry out thorough checks, not only on potential borrowers but also on the property on which the mortgage is to be granted. They should ensure the client realises that joining the property market is not a guaranteed route to financial fortune.
This can be seen by examining the changes in property values over the past four years. In some parts of the country, principally London and the South-east, values have been maintained; but in many places, owners have over the same period seen a 20 per cent fall in values, with 7 per cent of that being in the last 12 months alone. In practical terms that means if someone bought four years ago with a 75 per cent mortgage they will now not have enough equity to buy another property if, for any reason, they have to move.
The restriction of the mobility of homeowners has been a major contributing factor in the growth of the rental market and has also affected the number of purchase transactions.
The rules of supply and demand would suggest that prices might be expected to rise over the medium term, but for “normal” market effects to occur, there has to be a proper supply of funds and suitable borrowers.
To assume this to be the case, ignores the underlying economic ills that afflict the UK and most Western economies. Much has been made of the need to deal with the UK budget deficit (forecast at £122bn in the current year), but that pales into insignificance when compared with the £1,500bn of personal debt. That is £29,000 for every adult – or 123 per cent of the average annual income.
No wonder the Chancellor has pointed to the dire impact on families should it be necessary to raise interest rates from their historically low levels.
This level of personal debt is perhaps a greater problem for individuals than is the level of Government borrowing, but the prognosis for both is the same. If nothing is done, then the eventual landing will be hard and painful.
The Consumer Credit Counselling Service has identified that 6.2 million households are already financially vulnerable, and that 3.2 million are already in arrears with debt payments. There can be no doubt that we are dealing with a debt monster.
With a stalled economy, politicians are being careful not to use the prudence word that was so popular with our former Prime Minister but like the drunk that wants to get sober, the answer is not just one more drink. The answer is a serious dose of financial retrenchment and relative hardship.
Generalities cannot be applied without reference to the specific situation of the client but it is the professional duty of every adviser to ensure that the advice that is provided is the most suitable to their client’s needs, a responsibility that goes far beyond merely sourcing a product.
Richard Fox is chief executive of the Society of Mortgage Professionals