The scale of the credit crunch has not yet been fully disclosed as banks and other financial institutions struggle to work out which of their loans are going to be problematic. Previously banks were happy to lend loans to people in difficult financial situations, which they then packaged up and sold on to other banks for a profit.



This system worked while whilst their customers were able to pay back the interest on their loans. Times have got significantly tougher since then, and for some customers it became harder and harder to make the monthly repayments, which lead to the loans becoming debts. Banks are now losing money as the loans are not repaid which has led to them to restrict their lending criteria so that they avoid the same situation in the future.

In recent days one of the UK's biggest loan providers HBOS, has disclosed that they own almost five billion pounds of problem home loans. HBOS has said that twenty-six percent of its £250 billion pound mortgage loan book was made up of its specialist mortgages, which include buy-to-let and self-certified. The bank has admitted that over three percent of these specialist loans are now in arrears. A mortgage loan is considered in arrears when it has not been paid for three months or more. When combined with all of HBOS other home loans the total percentage in arrears drops to just fewer than 2 percent. None the less, 2 percent of £250 billion is a considerable amount of money.

Trying to re-coup this money may seem like a difficult task in the face of economic downturn but the banks have come up with some ways to make their money back. As those people who have defaulted on their mortgages or are in arrears can no longer afford to pay, the banks have started to target those who can. It is estimated that one million people will reach the end of their fixed rate deal at some point during this year and will be looking to remortgage in order to find a cheaper deal than their current lenders standard variable rate. These are the people the banks are targeting, with interest rate increases. Over the last couple of months the ‘big four' banks on the high street have put up their mortgage rates on two year fixed deals. Fixed deals for three to five year loans have also met with some interest rate increases. So far the only home loans which have not increase significantly are the longer term ten year deals, which unsurprising aren't as popular.

Another way that the banks are trying to recoup their profits is through the charging of loan arrangement fees. The Leeds building society recently topped the best buy loan tables with because of its relatively low interest rates; however they charge a three percent arrangement fee, which on a £250 thousand pound loan is £7500 pounds. In addition other lenders have also increased their lending fees with more than thirty percent now charging more than £750 pounds to organise a loan. These figures are steep and are going to hit consumers hard, however they will mean that the banks make some of the money back that they have lost through bad loans.