Property and Mortgage Markets

Question 1

What impact did the 2007 credit crunch have on the financial services sector?

Answer 1

• Profound effect on financial services.
• UK mortgage demand stalled in 2008.
• Regulations introduced to address crisis-exposed issues.

Question 2

What fueled the credit crunch in the early 2000s?

Answer 2

• Property boom, low interest rates.
• Lenders relaxed criteria, subprime lending.
• Mortgage bundles securitized.
• Risky borrowers defaulted, causing lender failures.

Question 3

How did the credit crunch affect the UK housing market globally?

Answer 3

• Banks pulled back on lending.
• Interbank rates increased, halting housing market.
• Global share prices fell.
• Confidence and trust in markets disappeared.

Question 4

What challenges did Northern Rock face?

Answer 4

• High-risk mortgages, heavy securitization reliance.
• Asked Bank of England for emergency funds in 2007.
• Government nationalized Northern Rock in 2008.

Question 5

How did the credit crunch impact the world economy?

Answer 5

• Rise in commodity prices.
• Large US financial institutions failed.
• Global spread of financial issues.
• UK government bailed out banks.

Question 6

What happened to the UK mortgage market post-credit crunch?

Answer 6

• Property market stayed depressed.
• UK economy went into recession.
• Banks hesitated to lend, caution increased.
• Stricter checks, higher deposits.

Question 7

How did the UK housing market change after 2013?

Answer 7

• Lending increased, market started recovering.
• Prices recovered by Q2 2014.
• Regional variations, London outstripping.

Question 8

What issues affect the contemporary mortgage market?

Answer 8

• Interest rates impact mortgage costs.
• Economic factors affect property prices.
• Affordability issues due to stricter checks, rising prices.
• Government supports first-time buyers.

Question 9

Question: What is a Basis Point?

Answer 9

• One-hundredth of one per cent.
• Used to express small percentage changes.

Question 10

Define Bank Rate.

Answer 10

• Rate at which the Bank of England lends to other financial institutions.
• Also known as base rate.

Question 11

Define Interbank Rate.

Answer 11

• Rate at which banks lend to each other.
• Transitioned from Libor to Sonia for all lenders.
• Sonia: Sterling Overnight Index Average.

Question 12

What is the relationship between Bank rate and interbank lending rates?

Answer 12

• Interbank rate historically 10-20 basis points above Bank rate.
• Example: Bank rate at 2%, interbank rate expected between 2.1% and 2.2%.
• Mortgage rates move broadly in line with the Bank rate in normal conditions.

Question 13

How are mortgage interest rates typically linked to Bank rate?

Answer 13

• Broad linkage to Bank rate.
• Directly affected by interbank lending rates.
• Historical interbank rate usually 10-20 basis points above Bank rate.

Question 14

Why did the significance of Libor as a benchmark reduce?

Answer 14

• Banks relied less on the interbank market post the 2008 financial crisis.
• Misconduct, including manipulation, diminished confidence in Libor.

Question 15

What is Sonia, and why is it preferred over Libor?

Answer 15

• Sonia is a risk-free rate based on wholesale market overnight interest rates.
• Used for years, difficult to manipulate due to reliance on actual transactions.
• Recommended as the primary interest rate benchmark, replacing Libor.

Question 16

How are mortgage interest rates linked to interbank lending rates?

Answer 16

• Interbank rate historically is 10-20 basis points above Bank rate.
• Mortgage rates broadly move in line with the Bank rate.
• Differential widens in difficult market conditions.

Question 17

What elements contribute to inflation in the property market?

Answer 17

• General inflation: decrease in spending power over time.
• Higher government borrowing puts upward pressure on interest rates.
• High individual borrowing can lead to inflation concerns.

Question 18

How does monetary policy impact interest rates?

Answer 18

• Government uses interest rates to control the economy, particularly inflation.
• High government borrowing increases interest rates.
• Interest rates affect the value of sterling against foreign currencies.

Question 19

How do foreign interest rates impact the value of sterling and its consequences on UK industries?

Answer 19

• When UK interest rates are higher than abroad, the pound strengthens.
• A stronger pound makes UK goods expensive abroad, negatively affecting sales.

Question 20

What are the two elements of inflation in the property market, and why is a small amount of inflation considered good?

Answer 20

• General inflation: decrease in spending power over time.
  *House-price inflation: increase in house prices over a period.
• A small (2–2.5%) amount of inflation is considered good for the economy.

Question 21

How can the Bank of England influence inflation through its Monetary Policy Committee (MPC)?

Answer 21

• To reduce inflation: BoE increases interest rates, causing lower spending.
• To increase inflation: BoE lowers interest rates, encouraging higher spending.

Question 22

What are some examples of government actions influencing the property market?

Answer 22

• Changes in taxation of buy-to-let (BTL) property impacting investors.
• Property purchase taxes affecting market dynamics.
• Government policies aiming to address issues like negative equity.

Question 23

How do specialised mortgage companies and challenger banks impact the lending market?

Answer 23

• Specialised mortgage companies are centralised lenders with limited branches.
• Challenger banks, newer entrants with online focus, have increased mortgage lending.
  = Both contribute to increased competition and innovation in mortgage products.

Question 24

What do we mean by negative equity?

Answer 24

When the property value falls below the outstanding loan amount of the mortgage loan secured on it.