Mortgage drought has worsened because lenders are tightening conditions, says Bank of England report

Published 01st Oct 2010

The struggle to get a mortgage, which is already impossible for millions people, is going to get even worse, an official report from the Bank of England has warned.

In a deeply worrying development, Britain's lending giants admitted they are changing the rules which means even fewer people will be accepted for a mortgage.

It comes as the number of mortgages handed out to buy a house has already plunged to less than 50,000 a month, compared to up to 135,000 a month before the credit crunch.

If the country's 'mortgage drought' gets even worse, the outlook for house prices, which are already falling, is bleak

The 'Credit Conditions Survey' report, from the Bank, said lenders have 'tightened credit scoring criteria' over the last six months - and expect to tighten them again over the next three months.

'Credit scoring' is the tests which customers must pass in order to be approved for a mortgage.

It involves a range of questions from whether or not you have fallen behind on your credit card payments and the size of your student debts to the number of years you have lived at your address.

Banks and building societies admitted to the Bank's officials, which conduct the regular survey, that they are taking 'a more cautious approach' to certain types of customers.

They are particularly concerned about anybody who puts down a deposit of less than 25 per cent on a property, and people who are self-employed.

In a clear warning, the Bank's report stated clearly yesterday that mortgage lending, which is the lifeblood of the housing market, is set to drop.

It said many lenders predict 'the loan approval rate was expected to fall in Q4 [October-December] for the first time since early 2009.'

In a speech in London yesterday, the Bank's executive director Paul Fisher also said the country's lending crisis will not go away for some time.

He said: 'Despite various forms of support from the Bank of England and from Government, it is clear that the lending capacity of the banking system, in the UK and elsewhere, is impaired.

Over the last week, the Skipton building society, has scrapped its 95 per cent repayment mortgages, and now offers a maximum of 90 per cent.

It has also introduced a new rule that interest-only mortgages are only available to customers who put down a minimum deposit of 75 per cent. It scrapped them for first-time buyers in February.

Other big lenders, such as Northern Rock, already say they will not hand out mortgages for more than 85 per cent of the property's value. Before the crisis, it offered up to 125 per cent.

David Hollingworth, from the independent mortgage broker London & Country, said: 'This is really bad news.

'It is a step back, making it even harder for people to get a mortgage.'

The biggest fear surrounds radical changes proposed by the regulator, Financial Services Authority, to how much people can borrow and what type of mortgage they can have.

The Council of Mortgage Lenders has slammed the proposals as 'fatally flawed', and warned people could become 'mortgage prisoners' because they will not be able to remortgage.

It is also feared that interest-only mortgages, which are cheaper and therefore popular with young people, could 'effectively vanish'.

Another worry surrounds the Bank of England's £185 'special liquidity scheme', which is being gradually withdrawn and will end completely in January 2012.

This scheme allowed lenders to package up their mortgages, and swap them for Treasury bills which they could sell - and use the money to hand out more mortgages.

As this scheme disappears, lenders could be facing a major funding gap which they will struggle to fill, a problem compounded by other funding pressures.

Mr Fisher said £57billion has now been repaid, but stated plainly yesterday in his speech that the scheme 'will not be extended or replaced.'

Source: ' Daily Mail '

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