The cheap mortgage era has ended as big banks choose not to compete, so can you still find good deals?

Published 23rd May 2012

Britain is set to be gripped by a mortgage drought, leaving desperate homeowners battling to get their hands on the last of the cheap deals.

The nation’s two biggest mortgage lenders — Lloyds Banking Group and Santander — are cutting back on the number of loans they give out this year.

And another leading name, RBS, is being accused of being reluctant to lend because it has priced its loans so high.


'WE CAN'T AFFORD TO GET ON THE HOUSING LADDER'

James Thornton and Angela Slater are just one of thousands of young couples who can’t get on the housing ladder.

The couple currently share a house with a friend in Putney, South-west London, and pay £750 per month rent.

They are hoping to buy a two or three-bedroom property for around £175,000 in Ulverston, Cumbria, where they grew up.

But in order to access the best rates they will need to save a 25 per cent deposit worth £43,750 — which will take them years.

‘We are putting away a bit every month,’ says 26-year-old Mr Thornton, a senior accountant. ‘We’ve been saving for around ten months and we still don’t even have a deposit worth 5 per cent.’

The couple are saving with Nationwide BS. Its Save to Buy scheme allows first-time buyers to get on the housing ladder with just a 5 per cent deposit if they save with them for at least six months.

But the mortgage rates are high — Nationwide’s three-year fixed rate is 6.24 per cent with a £400 fee.

House prices have fallen 3.5 per cent in Cumbria in the past 12 months. But Mr Thornton adds: ‘We won’t try to buy when the market bottoms out. We’ll just buy when the time is right for us and we can afford it.’


The value of mortgages lent in April fell by a fifth on the previous month, and hit the lowest level in a year, figures from trade body the Council of Mortgage Lenders revealed.

And while the number of loans dries up, buyers face a continued plunge in property values in many parts of the country, as well as rate rises and tough demands from banks.

Many fear this toxic combination could lead to a total collapse in mortgage lending.

The drought will result in tens of thousands of first-time buyers being locked out of the property market, and families being forced to scrape together their savings to convince banks to lend to them.



Why is the mortgage drought hitting?

The drought comes as banks are desperate to prop up their balance sheets.

In January, a Government scheme to help them swap risky debts for cash to fund mortgages came to an end.

This has stripped banks of as much as £185 billion they previously dished out as home loans.

And they are also facing tough new rules that demand they have more money from savers on their balance sheets, rather than using money borrowed from the investment markets.

Lloyds Banking Group, which includes Halifax and Bank of Scotland, wants to reduce its mortgage market share from 28 per cent to 25 per cent, but increase its share of savings from 23 per cent to 25 per cent. With the mortgage market worth £1.2 trillion, Lloyds would have to drop its share by an estimated £36 billion.

Meanwhile, Santander, which has been one of the biggest mortgage lenders in recent years, has not grown at all this year — and may even lend less. At the same time, it has increased the amount of savings it has by 3 per cent.

Some of NatWest’s cheapest loans are more than £300 a year more expensive than its rivals.

Some smaller lenders, such as Yorkshire BS and the Post Office, still have competitive deals. But experts warn these lenders cannot mop up the huge numbers of borrowers that look set to be rejected on the High Street.

On top of this, borrowers are being hit by higher mortgage rates, bigger deposit demands and tougher lending checks as banks scramble to protect their balance sheets.

Banks have already been forced to hike mortgage rates as the cost of the money they borrow on the investment markets has climbed.

They are worried about each other’s exposure to huge debts that may have to be written off in Europe. And many are also nervous about the state of the housing market at home, and borrowers’ ability to repay their loans.

Interest-only lending, which accounted for a third of all mortgages in 2007, has all but disappeared. Homebuyers must produce evidence they have investments in place to pay off the capital part of their mortgage.

Despite Easter being one of the busiest times of year, estate agents reported a dip in the number of buyers registering on their books in April.

The Government has tried to shore up the housing market along with the construction industry through a scheme that allows buyers to snap up a new-build home with only a 5 per cent deposit.

But only a handful of banks are lending under this NewBuy scheme.


'Lenders do not want to lend'

‘With the two biggest lenders planning to reduce their exposure to the mortgage market this year, it does not bode well,’ says Ray Boulger, senior technical adviser at broker John Charcol.

‘And other big names such as NatWest do not appear keen to lend, judging by how expensive their deals are.’

Borrowers with decent deposits and a good credit history can still get a good interest rate. But it is thought the amount of money available on these rates is scarce.

The Post Office has a five-year fix at 3.89 per cent with a £495 fee for those with a 25 per cent deposit. Monthly repayments on a £150,000 mortgage would be £783.

Lloyds TSB does not have any five-year fixed rates. Santander and NatWest have five-year deals at 4.19 per cent with a fee: £995 for Santander and £999 for NatWest. Monthly repayments would be £808.

‘We remain committed to underwriting mortgage business that is good quality and profitable, but we will adopt a more cautious approach in certain areas,’ says a Santander spokesman.

While a spokesman for Lloyds says: ‘We feel a more balanced loan and deposit book is the right approach in the current market conditions.’

RBS denies it is reluctant to lend. Its spokesman says: ‘We want to expand our lending. Our approach is to offer good value with a convenient and helpful service.’

Source: ' ThisIsMoney '

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