Cost of living crisis - back to the noughties?

28 June 2022

There will be many consumers, estate agents, mortgage brokers and solicitors that will remember - and worked through - the UK credit crunch in 2008. Yet some millennials will be less familiar with the financial challenges that we all currently face.

On the eighth of October 2008, the Bank of England base rate was 4.5%. Due to unmitigated circumstances, by the fifth of March 2009, it was 0.5%, where it has broadly lingered until this year. For many, this created a false environment, with fixed rate mortgages falling below 1% last year - this felt like the new normal. So, with rising interest rates, lets look at how the current market compares to 2008.

Then:

Looking back at what happened - according to the Bank of England - the root cause stemmed from when problems in the US sub-prime mortgage market started to influence the ability for banks to borrow capital. Rather than utilising customer deposits as the source of funds to lend to homeowners, banks turned to the international money markets. When issues in the US started to accelerate, those markets became nervous about lending to organisations linked to the housing market which caused funding to dry up. The first UK casualty was Northern Rock, who had borrowed to fund its expansion.

When consumers became aware of its position, they rushed to their local branches to withdraw savings. Whilst this led to the Bank of England cutting interest rates to support the economy, house prices fell by 15%, with demand for property affected by the availability of mortgage funding and a lack of available credit for potential buyers. The fallout was significant, with unemployment reaching its highest rate since 1995 and almost 2.7M people looking for work by the end of 2011.

Now:

Fourteen years on, banks are required to retain more capital to protect themselves against the losses experienced in 2008. In some cases, this can be ten times more than before the credit crunch.

Current demand for property significantly outweighs supply and ONS data confirms that house prices increased by 9.8% in March 2022. Employment, which has increased since early 2012 - albeit impacted by the pandemic - has also started to grow again. But, with more households experiencing a surge in the cost of living, mortgage affordability is becoming more difficult as consumers are increasingly unable to borrow sufficiently.

Mortgage borrowing with TSB

At TSB - where total income is more than £50,000 (individual or joint) - and for loans up to 85% of the property value, we’ve increased our income multiple from 4.75 to 5 times income. So, whether you’re employed or self-employed, you can still borrow responsibly.

We’ve also recently increased our maximum loan-to-value for New Build Houses and Bungalows to 90%, helping applicants with smaller deposits buy a brand new home. This includes Shared Ownership applications, where we will now allow up to 90% of the customer share of the purchase price.

At TSB, we continue to deliver an efficient service. Our Business Development Managers aim to return calls within three working hours. And, we now have regional service teams, together with a dedicated New Build and Self-Employed team, in which our multi-skilled experts can provide focussed support.

Thank you for your support.

Paul Dignan
National Account Manager