House prices and the state of the property market have a close relationship with mortgage lending. In the decade between the late 1990s and the mid 2000s, house prices soared in the UK, increasing dramatically both in property hotspots such as London and in many areas around the country.
This boom in the property market was accompanied by a period of cheap credit, lower interest rates and relaxed lending criteria.
Niche mortgage sectors such as adverse credit lending and buy to let also boomed in this period.
Unfortunately, this boom period slowed with the influence of the credit crunch, initially sparked by problems in the American sub-prime mortgage lending market.
During 2008, a tighter mortgage market appeared in which lending was more restricted. Partly as a result of this, house prices started to fall.
In our House Prices guide:
- Negative Equity
What negative equity is, how it affects your mortgage and finances, and how to avoid the situation of falling into negative equity.
- Dealing with Negative Equity
Some experts have predicted that 1 in 4 borrowers may find themselves in negative equity. How to handle falling into negative equity.
How are house prices related to mortgage loans?
In an era of booming house prices, a strong economy and low interest rates, credit such as a mortgage loan is likely to be widely available as mortgage lenders can afford to offer mortgage deals at low rates with high loan to value limits. However, as occurred in the UK in 2008, if lending criteria become tighter and borrowers can no longer afford mortgage loans, house prices will start to fall.
What is negative equity and how does it relate to house prices?
Negative equity is when the value of a house falls below the loan outstanding on the house, the mortgage. If house prices begin to fall, homeowners can find that the money owed on the mortgage is more than the worth of the house, effectively trapping the borrower. See the section on negative equity for more information.
What other problems could be related to falling house prices and stricter lending criteria?
If borrowers have to remortgage onto a mortgage expensive loan, repayment become more expensive, and arrears can be the result. Mortgage problems can mount up after missed repayments, and in some cases mortgage lenders may repossess the house if the homeowner can no longer afford to pay for it.