Banks restrict lending to UK buyers due to concerns about Eurozone crisis
14-05-2012
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The Halifax, Britain’s biggest mortgage lender, has increased its mortgage rates by up to 0.3% despite the Bank of England keeping the base rate at 0.5% for the 38th month in a row.
Yorkshire, the second biggest building society, is expected to announce similar increases and in recent days a number of other lenders have hiked their rates, including First Direct, Norwich & Peterborough and Nottingham.
‘The turmoil in the eurozone means banks are under huge funding pressures and are desperately trying to protect their profit margins. So home buyers, who are normally seen as the winners of low interest rates, are under attack as well as savers,’ said IHS Global Insight economist Howard Archer.
Richard Sexton, business development director of e.surv, the UK’s largest housing valuation firm, said that up until the early spring mortgage lenders absorbed steadily increasing funding costs imposed by investor anxiety in the wholesale markets rather than passing them onto borrowers.
‘This helped them cater for the rush of first time buyers looking to beat the stamp duty deadline, and helped boost activity in the housing market over the late winter and early spring. But we’ve reached a tipping point now. Banks and building societies can’t afford to sustain their current levels of high loan to value lending,’ he explained.
‘In addition to their increased funding costs, they are also concerned about their exposure to the debt riddled European countries, and the increasingly precarious state of borrower finances in the UK. As a result they’ve begun to scale back lending to first time buyers,’ he added.
The firm’s latest survey shows that first time buyers have been hardest hit by tighter lending conditions. Loans for new buyers drop to their lowest level for nine months and average deposit increased to 40%.
Loans on a typical first time buyer property worth up to £125,000 fell by 5% in April compared with the previous month and are 1.2% down on April last year. Banks blamed increasing mortgage funding costs and renewed fears over their exposure to the Eurozone crisis for the reduction in lending.
It is the third successive month in which first time buyer loans have fallen, confirming the Bank of England’s view that banks and building societies are pulling back from lending to borrowers with small deposits over the summer.
Overall loans for house purchases fell 1.4% from March. Banks lent disproportionately to wealthier buyers, reflecting their reduced appetite for lending to riskier borrowers. Despite the 5% fall in loans for the cheapest property, approvals in all price brackets over £350,000 increased. This helped prevent overall purchase approvals falling more steeply.
The tighter lending conditions were evident as the average deposit on a house purchase loan rose above 40% for the first time since February 2011. April was the fourth consecutive month in which the average loan to value has fallen, suggesting it is becoming increasingly more difficult for borrowers to access high LTV loans.
Purchase approvals were up 7.4% compared to April last year, however April 2011 was a weak month by historic standards.
