House Prices and Loans

By Michael Strauss

It's now fairly clear that property prices are falling, and while no one is sure just how bad things might get, many are predicting a significant drop in the market value of the average home. While this may be good news for new entrants to the housing market, it's less so for people with large mortgages who may face the prospect of negative equity - especially those who took out mortgages at the height of the property boom. But what does the possible property crash mean for people looking for loans?

Lower Loan To Value (LTV)

The most immediate impact will be a reduction in the amount homeowners can borrow. Whereas once it was commonplace to see adverts offering loans of up to 125% of your home's value, these days few lenders will be willing to extend more than 70-80% as they seek to insure themselves against dramatic drops in the value of the property they're securing the loan against.

Pricier Loans

Many people will also face higher interest charges as they fall into the so-called 'sub prime' category of borrowers. High levels of equity in property could previously mask some adverse information on credit files, pushing the borrower into the prime lending classification - take away this equity, and suddenly this classification can be withdrawn, making your loan more expensive.

Unsecured Finance

But it's not just homeowners who will be affected. The general lack of confidence in the economy will also feed through to the unsecured finance and personal loan arena too - banks are already becoming far more picky about who they issue credit cards to, for example, and they're also tightening their lending criteria on their unsecured loans. The picture all round is one of lower approval rates and higher interest charges.

So, with acceptance criteria on finance of all types getting stricter, and the costs of borrowing money rising, it makes sense to act quickly if you think you might need a loan in the near future - for if the fall in property prices becomes as serious as some are predicting, putative borrowers may well find that their options have dried up.