Mortgage availability 'will worsen this year'

Mortgage availability is expected to worsen during the third quarter of the year as lenders find it harder to raise funds, research suggested today.

A balance of 11.4 per cent of banks said they expected to lend less during the coming three months, due to an anticipated tightening in the wholesale funding markets, according to the Bank of England's Credit Conditions Survey.

Lenders also expected caution about the economic outlook to constrain lending levels, while they do not plan to expand their market share - a factor that had led to a small increase in mortgage availability during the second quarter.

Concerns about the state of the economy led to the availability of credit for businesses rising by less than had been anticipated during the three months to early June, although banks expect lending to firms to increase slightly.

But despite the rise in mortgage availability, lenders said demand among people buying a property had weakened for the second consecutive quarter as activity in the housing market remained subdued, although there was a slight increase in the number of homeowners remortgaging.

Increased competition led to a narrowing in the margins lenders charged on mortgages and this trend is expected to continue during the coming three months.

The proportion of a property's value banks were prepared to advance also rose for the third consecutive quarter.

Lenders reported that the number of people defaulting on mortgages fell unexpectedly during the second quarter, continuing the downward trend that began during the first half of 2009.

This trend is expected to continue, although lenders warned that a deterioration in the economy could cause default levels to rise again.

There was also a fall in the number of people defaulting on unsecured debt, which lenders attributed to the tighter credit scoring they now use.

The availability of unsecured credit remained broadly unchanged during the second quarter, although it is expected to increase slightly during the coming three months.

Banks loosened their lending criteria for credit card customers for the first time in two years, but they have continued to tighten it for other borrowers.

In terms of business, the survey found that the availability of credit increased for both small firms and medium and large companies during the second quarter.

But lenders reported an unexpected fall in demand from medium and large businesses due to the economic uncertainty, with lending largely driven by firms refinancing maturing facilities.

Increased competition continued to lead to improvements to both the price and terms of lending for companies, particularly for lower risk firms.

Default rates among small businesses rose during the quarter, but by less than expected, while there was a sharp fall in the number of larger companies that were unable to keep up with their debts.

Jonathan Loynes, chief European economist at Capital Economics, said: "The Bank of England's latest credit conditions survey strikes a fairly downbeat tone, with banks expecting mortgage availability to decline over the next quarter."