The Vanishing Mortgage Market

It’s a tough time to be a borrower at the moment. Until relatively recently, credit was cheap and easily available, and mortgage lenders were all but fighting each other to win business.

However, the boot is now on the other foot. Since the credit crunch took hold last year, it has become increasingly difficult and expensive to borrow; banks and building societies have tightened their lending criteria and raised their rates, and the availability of mortgages has contracted sharply.

In its recent Credit Conditions Survey, the Bank of England has warned not only of a decline in the availability of mortgages, but also of a likely increase in the proportion of defaults by struggling homeowners. The heightened risk that some borrowers might default on their mortgage payments has spurred many lenders to make their lending criteria more restrictive, reducing the opportunity for higher-risk applicants to borrow money.

Meanwhile, new mortgage approvals declined from 74,000 to 73,000 during February, a drop that took the figures close to their 13-year low. Steepening mortgage rates are deterring potential first-time buyers from entering the housing market. However, demand is still relatively high in certain areas – the fixed-rate deals of over a million borrowers will expire this year, forcing them to look for new deals. Meanwhile, following the collapse of Northern Rock and its subsequent nationalisation, many of its customers are looking to move their mortgages to an alternative lender.

Several lenders have reduced access to their mortgages; and attractive deals have become increasingly rare, so any company offering competitive rates has been swamped with potential customers. First Direct has temporarily stopped offering mortgages to new customers while it catches up with the paperwork, and Abbey has now withdrawn the last straightforward 100% deal ‘in order to maintain high service levels’.

The Bank of England has cut interest rates to 5.5%, and rates are widely expected to fall further over coming months. Despite this, many lenders have actually raised their mortgage rates; the global credit crunch has deterred banks and building societies from lending to one another, so the companies are working to protect their profit margins. In the long term, banks and building societies are likely to regard the current situation as an opportunity to clean up their lending books and emerge in better shape; in the immediate future, both borrowers and lenders are likely to feel the pain.

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