Part of the reason that the credit crunch occurred was that banks were too willing to give homeowner loans to people with bad credit ratings. In 2004 you could take out a homeowner loan of 125% of the value of the property. This was referred to as 125% mortgages. In effect they were lending you far more money than your property was worth. They were doing this because they were earning  huge rates of interest for what seemed very stable as property prices were rising fast.

The problem with giving high percentage mortgages was that when home prices started to fall as they did last year people couldn’t afford to pay back the loans. This meant many 90% -125% mortgages went into default. Immediately banks became scared to loan and cut their mortgages to 90% mortgages.

In 2009 banks are so scared to lend that most banks dont even offer 90% mortgages. Gordon Brown has pumped billions of pounds into banks to try and get them to lend. The aim is to start lending at 60% mortgages and increase to 90% mortgages once the housing market picks up and the economy recovers.