Can't lend won't lend: Banks unrepentant as mortgage lending lowest for a decade

Published 24th Sep 2010

What’s happening?

This week the Council of Mortgage Lenders (CML) reported that the amount of money dished out to homeowners in August was the lowest for a decade.

It plunged to £11.4 billion from £13.3 billion in July — a fall of 14 per cent. The number of people buying a house fell by 5,000 between July and August. And the number remortgaging is down dramatically too.


What’s behind this?

The CML says the supply of credit is ‘limited’ — meaning there is less cash available to pay for new mortgages. Banks traditionally raise cash from each other to lend as mortgages, but this has dried up.

And banks are paying such pathetic rates to savers that this supply of money has also been reduced.

Savers who are reluctant to put their cash in accounts paying as low as 0.08 per cent after tax (0.1 per cent before) are instead turning to the stock market.

But it is not just the supply of new loans that is hampering the mortgage market. There is a dearth of homebuyers too.

Property expert Rightmove says that on average each of the estate agents it monitors are confronted with a record 79 unsold properties. At the beginning of 2010 the number was 63.

The future of house prices is uncertain — which could dissuade anyone looking to take out a larger loan.

Halifax says that since January house prices have fallen in four months and risen in four.

What does the future hold?

Things are likely to get worse before they get better. From 2011, the mortgage market is facing a £300 billion black hole when the Government’s rescue deals for banks and homeowners end.

To begin with, banks face a series of deadlines to repay £165 billion from the Bank of England’s special liquidity scheme.

The removal of credit guarantees is likely to make banks more nervous about lending to each other.

Uncertainty in the job market is another threat. As public sector job cuts start to be made, it is likely further to stifle the property market.

Bob Pannell, chief economist with the CML, says: ‘The extent of the imminent public sector spending cuts has become more clear. Consumers remain cautious and household incomes will remain under pressure.’

So who is lending?
Today £9 out of every £10 of mortgages is lent by Britain’s five biggest banks and Nationwide.

Yet in 2009 the amount of money lent by Britain’s biggest mortgage lender, state-owned Lloyds Banking Group, collapsed from £788billion to £35 billion — a fall of 55 per cent. Getting funding was impossible

All the major banks and building societies significantly cut the amount of money they gave out as home loans from 2008 to 2009.

Santander lent a quarter less — cutting the amount of loans it issued from £35 billion to £26 billion.

Meanwhile, many of Britain’s smaller lenders — mainly building societies — have been hamstrung by the credit crisis.

Where once they were able to offer deals that competed with some of the best rates, now some are not lending mortgages at all.

They were hit with spiralling bills for bailing out failed banks and tougher rules on how much money they needed to have in their coffers.

Daoud Fakhri, analyst at researcher Datamonitor, says: ‘Most people would have expected building societies to emerge from the credit crisis in a stronger position than banks. It seems that although they didn’t engage in high-risk lending they have suffered.’

Even those banks that are lending are being selective. Mortgage brokers say vast numbers of homeowners are being turned down for top deals, as they do not meet a bank’s precise requirements.

Why is it tougher to get a mortgage?

Many people have found themselves shut out of the property market as banks come under increasing pressure from the City watchdog to tighten lending criteria.

In July, the Financial Services Authority (FSA) published a series of tough new measures, including banning self-certification mortgages — called ‘liar loans’ — which did not require a borrower’s income to be checked.

It also called on all banks to check that borrowers could afford to repay loans over 25 years. And there were restrictions placed on mortgages being allowed into retirement.

Banks have responded by being even more picky when choosing mortgage customers - it is very difficult for the elderly,self-employed and those with a bad credit history to get a loan.

All borrowers have to undergo strict tests to prove they can pay off the loan and some lenders will demand evidence of income going back two years.

You will not be given an interest-only mortgage unless you can prove you have a definite way to pay off the capital at the end of the mortgage term.

Before the credit crunch, it was possible to get a mortgage for the entire value of your property or even as much as 25 per cent more.

Now, most lenders require a deposit or equity of at least 10 per cent, which prices many people out of the market and the very best deals require a deposit of 25 per cent or even 40 per cent.

Many banks have recently changed their policy on lending into retirement — Santander and Coventry Building Society have reduced the maximum age from 85 to 75.

NatWest will not allow a mortgage to last beyond retirement or past the age 70 if the homeowner is still working, while a spokeswoman for Lloyds said ‘ideally’ a mortgage
term should not exceed a borrower’s planned retirement date.

What are the best deals?

The best fixed rate for someone with a 10 per cent deposit is with Yorkshire BS, fixed at 4.99 per cent until November 2012, with a £995 arrangement fee.

On a typical £150,000 loan this would mean monthly repayments of £876 or £22,019 over the two-year term.

The best two-year tracker is with Newcastle BS at 4.49 per cent, with a £694 fee. This would mean monthly repayments of £833 — or £20,686 assuming base rate stays the same during the two-year period.

The best five-year fixed rate is with Britannia BS at 5.89 pc with a £499 fee — this would be £956 per month, at a total cost of £57,859 over five years.

Buyers with a larger deposit of 25 per cent can get a two-year fixed rate with Principality BS at 2.74 per cent, with a fee of £1,499. Monthly repayments would be £691 with a total cost of £18,083 over two years.

The best two-year tracker is with Market Harborough BS at 2.48 per cent for two years with a £1,290 fee. Monthly repayments would be £671, at a total cost of £17,394.

Borrowers with 40 per cent equity could opt for a two-year fixed rate with Santander at 2.75 pc, with a £1,995 fee, or a NatWest two-year tracker at 2.19 per cent with a £999 fee.

The former would be £692 per month (£18,603 in total), while the NatWest deal would be £650 per month (£16,599 in total assuming the base rate stays the same).

Is it worth remortgaging?

When borrowers come to the end of a special fixed or tracker mortgage deal they will move on to that bank’s standard variable rate (SVR).

The average is 4.73 per cent — higher than Bank of England base rate at 0.5 per cent.
But some of those lucky enough to be on SVRs with Nationwide (for mortgages arranged before April 2009) or Cheltenham & Gloucester (pre May 2010) will be paying only 2.5 per cent, while all Halifax customers on its SVR are paying 3.5 per cent.

All of these rates are far lower than many of these homeowners would be able to get if they took out a new deal — especially if they had less than 25 per cent equity. Plus they would also have to pay a fee.

However, some homeowners pay more for their SVR — Woolwich is at 4.99 per cent and Chelsea BS is at 5.79 per cent.

Michelle Slade, from data analyst Moneyfacts, says: ‘Banks have been trying to lure customers off SVRs by lowering fixed rates.

‘If you have equity of more than 25 per cent in your home, you may be able to find an even cheaper fixed rate than your SVR — and benefit from the security of knowing your rate won’t rise.

‘However, many borrowers on low SVRs are happy to stay put, especially as many people think that interest rates will stay low for some time.’

Source: ' This is Money '

View All Latest Articles