Why the credit crunch happened and what it means

The financial news stories seem to be full of the crisis at Northern Rock, who’s going to buy them, how will it be funded and the credit crunch. But what does it all mean and what affect will it have?

Firstly you should know that mortgages are funded and how they’re funded. UK banks and building societies always used to lend money, in the form of a mortgage, from the savings it had built up from customers saving money with them. In the last 10 years new companies lent the money to UK banks and building societies and the funds for these mortgages are usually part of far more complicated city investments.

The credit crunch came about in the US sub prime or adverse markets as money had been mortgaged with customers or borrowers who couldn’t keep up with repayments. This eventually impacted on the investors holding the debts and so the market for these investments has now ceased to exist.

Of course the most well known case was Northern Rock who relied on this kind of market to fund their mortgage products. However Northern Rock are not the only organisation to have withdrawn their products or tightened their lending criteria.

The majority of UK high street lenders have not been affected by the current market problems. They continue to receive a good level of applications and most of this type of lender has ongoing funding lines to meet demand.

With the Bank of England lowering base rates in December by 0.25 per cent I think this has given some confidence to consumers and it hasn’t marked the end of the UK financial industry, thank goodness!

Simon Duffy writes for the Financial Blog a UK Finance Blog talking about all aspects of personal finance including loans blogs, credit cards blogs, tenant loans, credit cards blogs, mortgages blogs, insurance blogs and more.