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News - 3 April 2008

Mortgages get harder to find

The Bank of England has warned that the squeeze on the availability of mortgages is expected to continue and get worse in the next three months.

It also predicted that demand for home loans was likely to fall slightly during the same period as people held off buying decisions due to the uncertain nature of the economy.

The Bank of England’s Credit Conditions Survey said lenders expected a rise in the rate of homeowners defaulting on their loans as the costs of mortgages rises but availability declined.

Lenders are also expected to cut the amount of other loans in the next three months, not just mortgages but also credit cards and overdrafts.

The survey asked lenders about their predictions for mortgage availability over the next quarter. A balance of plus 43% thought that increasingly limited availability would get worse as the appetite for risk diminshes.

On Wednesday, First Direct, the Co-operative and Lehman Brothers' Southern Pacific and Preferred Mortgages all announced they were suspending some mortgage offers and 100% mortgages are now almost extinct and even 95% mortgages getting increasingly hard to find..

According to financial information service Moneyfacts, the number of mortgage products on offer has fallen by 20% over the past week.

There are now just 4,270 different mortgage deals available compared to 15,599 in July 2007 and over 7,000 only last month. This means that 1,4 million people having to re-mortgage their homes, due to fixed interest deals coming to the end of their terms in 2008, will need to shop around more for a deal. And first time buyers face having to find a much bigger deposit than would have been the case before the squeeze began.

With the Land Registry putting the average cost of a home in England and Wales at £185,616, buyers could need a 15% deposit of £27,842 for a typical home.


Sadly for people coming to the end of a cheap rate fixed mortgage (somewhere between 1.5 and 2 million people this year) this situation is likely to get worse. Because mortgage lenders are unable to borrow they have less money to lend themselves so they increase their rates and tighten their conditions to price people out of the market.

When one lender does this, borrowers try their luck with another lender, which similarly has to increase its rates to push away the business. This means the first lender looks competitive again and so has to make a further rate increase.

The situation will not change until we reach the bottom of the exposure to sub-prime lending losses and there is a clear picture of just how much banks have lost. With the admission this week from Swiss bank UBS that its losses at $18bn are twice the previously declared figure, that time does not look close.

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