What does Lehman Brothers fall mean to you?

Will British consumers be hit by the Lehman Brothers collapse?

Lehman Brothers is an investment bank, so people do not have Lehman Brothers savings accounts, mortgages or pensions. The vast majority of UK borrowers and savers will have no direct exposure to Lehman Brothers. A handful may have mortgages linked to the bank, as it did have some mortgage subsidiaries. These loans will be sold on and payments will continue as normal.

Indirectly UK consumers will be hit however. Most UK banks and pensions funds will have had dealings linked to Lehman and the complex web of international finance means many institutions will be facing future writedowns.

The biggest hit will be felt in terms of stock market values and investor confidence. Falling stock markets are bad for pension funds, businesses and banks, and this will all impact on the wider economy and British consumers.

Can this affect the property market?

The property market has become the albatross around the neck of the global economy. The credit crunch has its roots in the US mortgage crisis and borrowers’ inability to pay loans back as prices stopped rising and then began to tumble.

As the US property market has crashed, these difficulties have spread beyond poor credit ‘subprime’ borrowers and have begun to affect higher grade property owners. Despite repeated claims that they are in control of the situation, banks are fearful that they still do not know the full extent of the problem and the ongoing credit freeze has further exacerbated the problem.

Not only do UK banks have exposure to the toxic investments created by selling on US mortgage debt, but they also fear similar problems spreading in the UK from lax lending practises. The UK does not have the easy planning laws that allowed huge over supply of property in the US, but it did have rapid and unsustainable house price inflation, an oversupply of certain properties – new build City centre flats – the buy-to-let investment bubble and a raft of 100%-plus mortgages.

Many of the problems UK borrowers are currently facing come as lenders reprice risk and the best value loans are only offered to those with sizeable deposits, leading to large repayment increases for those remortgaging on high loan-to-values and a sudden halt to rising house prices as credit dried up.