Demand for mortgages pushes up UK rates

Published 22nd Jul 2009

Lenders are raising interest rates on mortgages as demand outstrips their ability to fund loans, according to the Bank of England.

There were 51,100 mortgage approvals to buy homes in June, compared with 45,000 in May, the Bank of England reported in its Trends in Lending monthly survey. That is the highest level of lending since early last year, and consistent with ongoing signs of stabilisation in the housing market.


However, last month also saw many lenders increase the mortgage rates they charged borrowers, making borrowing more expensive and threatening to choke off a nascent recovery.

In part this reflects the rise in longer-term funding costs over the course of the financial crisis, the Bank said, as well as expectations that interest rates will be higher in the future. But some lenders told the Bank that a pick up in demand from would-be homebuyers had led them to increase their rates on fixed-rate mortgages above the rise in swap rates, which determine the costs of funding fixed-rate lending.

“Discussions with the major UK lenders indicated that, for some, the most recent increase in spreads may also have reflected the strength of demand for fixed-rate mortgages relative to their capacity to fund them,” the report said.

The findings are consistent with surveys by the Royal Institute for Chartered Surveyors, which have shown record levels of interest in buying homes, even as actual transactions have only improved slightly.

This year, borrowers have increasingly chosen to take out fixed-rate mortgages, which accounted for around 70 per cent of new mortgages in May, amid fears over the future of the economy and as they seek to lock in the advantages of the record low Bank rate of 0.5 per cent.

The Bank’s findings come from its monthly “lending panel” survey, comprised of the major UK lenders accounting for around 65 per cent of lending to businesses, 70 per cent of mortgage lending and 50 per cent of consumer credit.

The report showed that gross new loan advances to UK companies made in June remained at similar weak levels to earlier in the year. “New facilities are reported to continue to reflect mainly the refinancing of existing customers’ facilities, and so have not flowed through into additional (or net) lending,” the Bank said. Much of this is due to weak demand, the report notes, with companies displaying “very weak investment intentions and a preference for preserving cash”.

Source: ' FT '

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