Mortgage Lending Conditions

With interest rates at 3% (and expected to fall soon), you would expect a sharp uptake in the number of mortgages. However, mortgage lending conditions remain tight. This is because:

• Banks still reluctant to lend. The Libor interbank rate is nearly 1.5% above the Bank’s base rate (usually it is just marginally above the base rate). This Libor rate reflects the unwillingness of banks to lend.
• Falling House Prices and Negative Equity. This is probably biggest reason for continued decline in mortgage lending. Falling house prices mean banks want to protect themselves by demanding bigger deposits. But, falling house prices are a great disincentive for potential homeowners to buy.
• Banks have been removing mortgage products from the market. Any new tracker mortgages are coming at significantly above the base rate (rather than below it during the boom years)
• HBOS, Northern Rock and Bradford & Bingley have virtually left the mortgage market as they struggle to improve their balance sheets.

Is the Demand for Mortgages There?

• When HSBC went looking for business in the re-mortgage sector it found demand was greater than it could cope with. Therefore, it soon left.
• The one bank to actively increase its market share is Abbey, owned by the Spanish group Santander.
• After the interest rate cut, there was a marked increase in activity on mortgages.co.uk
• Some banks such as Barclays and HSBC have been reluctant to pass base rate cuts onto consumers.

Outlook for Mortgages

• The recession will cause rising unemployment. Some forecast unemployment could rise to just under 3 million by the end of 2009. As unemployment rises more will be forced to sell their house (whatever interest rates). This will keep house prices falling and as house prices falling, banks will continue to demand large deposits to protect against negative equity
• After the merger of Lloyds TSB and HBOS. It may enable HBOS to start lending more mortgages.
• Northern Rock is currently trying very hard to repay the government debt. But, the government may start to encourage it to be less aggressive in repossessing homes and encourage it to lend more new mortgages.