Lenders 'will curb mortgages' despite Bank helpExperts say homeowners still face price falls

22 April 2008

A for sale sign

Homeowners faced with dearer mortgage deals and first-time buyers struggling to gain a foothold on the property ladder can only hope that yesterday's £50 billion initiative will ease a squeeze on lending among banks.

As well as hiking borrowing costs - despite official interest rates coming down - lenders have also hit would-be borrowers with bigger application fees and higher deposit demands as they look to shore up their finances.

An estimated 1.4 million homeowners due to come to the end of short-term fixed rate deals this year are braced for 'repayment shock' as their mortgage bills are set to shoot up at a time of rising food, petrol and energy costs.

Fixed rates

The average rate that borrowers have to pay on a new fixed rate loan has soared to a seven-and-a-half-year high of 6.64% at the end of last month compared with 5.51% at the end of November, according to Bank of England figures.

Last week, the UK's biggest mortgage lender, Halifax Bank of Scotland, upped rates on its short-term fixed rate deals by up to 0.5%, despite the Bank of England's latest interest rate cut.

Meanwhile, the average fee on the five most competitive two-year fixed rate deals spiralled from £999 in March last year to £1,478 now, mortgage company Mform.co.uk. has said.

First time buyers

First-time buyers without a big deposit have been all but pushed out of the housing market as the major banks look to minimise risks and hoard cash.

The lack of funds available for lending has threatened to accelerate a cooling off in the housing market, set in train by five rate hikes between August 2006 and July last year.

In March, house prices dived at their fastest rate since the market crash in the 1990s, according to the Halifax.

Realistic

The average cost of a home dropped by 2.5% during the month - the biggest monthly fall since September 1992 and the second largest drop ever - as annual house price growth also slowed to its lowest level for 12 years.

Howard Archer, chief UK economist with Global Insight, said the Bank's move is a welcome step but it is 'important to be realistic' about what the scheme can achieve.

He said: 'With the economic environment deteriorating banks are likely to - and should - limit the amount that they lend anyway even if liquidity becomes increasingly available and cheaper.

'What is important is that banks have the necessary funds available to lend sensibly to consumers, businesses and house buyers who have good credit ratings and are not over-stretching themselves.'

Support

But he added that the aid package is unlikely to prevent further falls in house prices over the next 18 months.

'The scheme will hopefully provide some support to the housing market through making it easier for banks to get funds for mortgage lending, but it remains highly likely that house prices will fall this year and next,' Mr Archer added.

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