My Comments on the Credit Crunch

Greetings from rainy Nashville, Tennessee (y'all).

I'm over here for a few days attending a seminar on speaking and marketing. Yes, I know I do this all the time but we never stop learning, do we?  And because this is CPD (continuing professional development) in my field, the entire trip is a legitimate business expense.  This is one of the reasons everyone should have a business of some kind as there is so much you can put through and pay with pre-tax money rather than after-tax money, but I digress.

I've been asked to comment about the current so-called credit crunch and what it means to the housing market.  Obviously, it's something I've addressed in my talks but I know that not all of you get to see me speak so let me give you some thoughts right now.

Whatever happens, banks must still lend money because that's what they do. If they are unable to do this, they will go out of business.  The problem is, where do these banks get the money to lend?  Well some of them (Northern Rock) get the money from their depositors. They pay interest to their depositors at a certain rate and lend the money as mortgages at a higher rate and pocket the difference (in very basic terms). 

You would be doing the same thing if you borrowed money at 0% on a credit card for 9 months, put it in a bank account guaranteeing you 6% interest and repaid it before the end of the 9 month interest-free period.  You would have made 6% (less a small balance transfer fee) from one bank using another bank's money. You're probably not going to get rich this way but it's free money, isn't it?

What happened with Northern Rock was that they needed more money than they had from depositors in order to fulfill their mortgage obligations. At the same time, the money lenders they would traditionally have gone to were constrained by having had to start writing off debts lent to sub prime (poor credit risk/defaulters) borrowers in the US market, so the money was either not available or was offered at too high an interest rate for Northern Rock, so they went to the Bank of England for a loan. No real problem with that.

Unfortunately, the newspapers got hold of it and, in my opinion, blew the whole thing up out of all
proportion so we had people queueing to withdraw their funds from Northern Rock. So then they needed even more money from the Bank of England and ended up in their current situation.

And, of course, these people who withdrew their money have had to put it somewhere, or take it out of circulation altogether and shove it under the mattress, which means even less money slopping around for the banks to use.

This is a very simplified version, of course.

From my research, here's what I believe will be the effect of all this on us as property investors:

Because the banks have access to less money to lend, they must make the right decisions about where
to lend it.  When I apply for mortgages now there's a lot of emphasis being put on the questions about my existing portfolio and years of experience in the business.  The banks are willing to lend to
EXPERIENCED investors with good cash flow management.This will make it more difficult for beginners and people who don't show such good management (which, of course, shows up as missed payments in their credit report).

ACTION:  If you haven't already done so, I suggest you get copies of your credit reports from Experian
&/or Equifax and go through them with a fine toothcomb to ensure they are all correct.  Look through
the eyes of a lender. Would YOU lend money to you?

Visit www.creditexpert.co.uk and you'll get access to your Experian credit report for 30 days for free.
I actually pay the £5.99 a month to keep tabs on my credit report as it's the most valuable thing a
property investor can have - a good, clean one, that is.

Also visit www.equifax.co.uk, and do the same.

Make sure you set up direct debits for all credit cards to at least make the minimum payments so you
never miss one.  You can always pay extra.  In fact, if you can afford to pay double the minimum each
month, the credit card companies are more likely to increase your limit as you're showing them you
can afford to pay more.

Always accept a credit limit increase because one of the things that improves your credit rating is
the ratio between your borrowing and you available credit.  It's the usual thing, if they think you
don' NEED the money, it will be offered more freely than if they think you need it.

Now the people who will find things very difficult will be those people who have not protected their
credit.  Anyone with missed payments or judgements against them coming to the end of their fixed rate
and applying for a remortgage will find the rate they're offered will be much higher, if they can
get a mortgage at all due to the risk they represent. This WILL result in people being unable to afford
the higher mortgage payments and an increase in repossessions on the market.

This is where a challenge for one person becomes an opportunity for another.  Also, remember that
these people still need to live somewhere so they will have to rent.  Many will have to sell quickly
as the mortgage arrears start to mount up and if you're in a position to act, you will be able to
buy below market value. You can help them out by saving them from repossession and even renting
their property back to them, with many, many variations on this that you can consider when
you know how and think creatively.

There will also be people who get jittery because the newspapers are bombarding them with dire
warnings of a crash, so they decide to sell up and rent (in other words, gamble with their own home),
which increases the pool of tenants for us landlords. People who really want to do this will believe that the market is slowing and will think they're going to have to accept lower offers - again, great for us investors.

It's interesting that all the big property investors I know are gearing up to buy like crazy for the next
6-8 months, and I think that's how big the window of opportunity is going to be.  I suspect in 8-12
months, things will be back to normal, so DON'T WAIT.  GET GOING RIGHT NOW if you're serious about
taking advantage of opportunities in the market, I certainly am.

Another interesting thing is that whilst I've been here in the US I've been discussing property/real
estate with other course attendees who are US citizens and residents. Many of them have said things
like "well I've been hearing that at least things here in the US are not as bad as they are for you
guys in the UK".  Which surprised me no end because in our UK news reports the implication is that at
least things in the UK are not as bad as they are in the US as the UK banks do not have the same exposure to sub prime lending as the US banks.

Many of you will already know my opinions on newspapers anyway - they are written to sell papers, not
to help you make financial decisions about your life.

So make sure that through all this you learn as much as you can (but only from people who really understand what they're talking about), guard & improve your credit rating, don't allow fear to creep into your decision-making and see the opportunities that others will not see.

Comments

[Laura Swain]

Hi Maria,

I enjoyed reading your blog piece, thank you for your advice. I signed up to Credit Expert to take advantage of the 30-day free trial but then signed off. I found another service which allows you to check online your report whenever you please.

CallCredit Check

I always shyed away from checking up on my financial statements of any kind but time for burying your head in the sand is over. Expecially when you are now running a business.