Lenders lock out new borrowers amid fears over housing crash

Three-quarters of mortgage products disappear from the high street, as Bank of England plans £50bn bail-out

Amid news yesterday that the Bank of England is preparing a £50bn support package for high street lenders, it emerged that UK banks have tightened the screws further on borrowers by introducing stricter criteria and withdrawing products.

Financial analysts Moneyfacts said that the number of mortgages available to UK consumers dipped below 4,000 last week, meaning that three-quarters of all products have evaporated since last summer. One leading mortgage broker, David Hollingworth of London & Country, said that the mortgage market had been pared down to its "bare bones" as banks looked to reduce the amount of money they were lending out and protect themselves from potential loses due to falling house prices.

While the initial clampdown hit first-time buyers, now even established property owners are being affected. Abbey, the UK's second biggest mortgage lender, has moved to tighten its lending criteria for people aiming to borrow sums of more than £500,000.

In future, people looking to borrow more than half a million to buy property will have to find a minimum 15 per cent deposit. Until now, borrowers were asked only for a 5 per cent deposit. Loans over £1m will require a hefty 25 per cent deposit.

"This is all about Abbey protecting itself against negative equity," Ray Boulger from broker John Charcol, said. "Higher-value property often falls further than lower-value housing so lenders want borrowers to have more of a buffer in place."

Backing that view, the property website Rightmove said on Friday that house prices were starting to fall substantially in upmarket London boroughs such as Kensington and Chelsea. The website reckons that sellers cut prices by 2 per cent on average last month in a desperate attempt to attract buyers.

Experts also believe that fears over house-price falls and the spectre of negative equity will see lenders offer fewer interest-only home loans. Under this type of loan the borrower doesn't have to repay the capital borrowed until the end of the mortgage term. This could hit first-time buyers, who are already struggling to meet demands for bigger deposits.

"Many interest-only deals have been taken by first-time buyers looking to keep their payments down. With house prices falling, lenders are bound to be tougher about who they lend to," Mr Hollingworth said.

Traditionally, borrowers looking to secure a mortgage have been able to turn to a broker to get them the right terms. However, this option may be being gradually closed off by some lenders.

It appears lenders are choosing to limit some of their deals to people who come to them direct rather than through a broker.

"The proportion of direct-only mortgages has definitely gone up," Mr Boulger said. "The most high-profile lender moving on this has been Nationwide, which said last week that its three-year, fixed-rate mortgages were available only to customers who went to it direct rather than through a broker. It has never done anything like this before."

When asked why it had ditched its former policy, Zoe Stevens from Nationwide said it was necessary "to better control volumes of business and ensure we can deliver the right service". The lender did not rule out extending this policy to the rest of its mortgage range, but Ms Stevens said she was "not aware of any plans to do so".

Meanwhile, a senior manager at a rival lender, who wished to remain anonymous, said closing the door to brokers during a period of market turmoil, such as now, had advantages. "Brokers bring volume which was hugely important. However, volume isn't the name of the game now. Keeping control on who the money is going to is key."