So will mortgage lenders ever let us come back in?

One bailout and one rate cut later and still there's no relief for borrowers. The taps will be turned on again eventually, finds Julian Knight, but forget about generous deals
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The Independent Online

Housing is going from bad to worse despite the Government's multi-billion- pound bailout scheme for British banks. A survey last week revealed that estate agents are selling just one property on average every seven days – an unprecedented low number.

Agents blame the banks, and their continued lack of willingness to lend, for the moribund state of the property sector. "There is demand out there – people want to move home. The market is like a hosepipe full of water but the banks have their foot on it, causing pressure to build up with no outlet," says Nick Salmon, an estate agent and board member of the National Federation of Property Professionals.

"The life has been strangled out of the market by lack of lending and agents are disappearing right, left and centre. I wouldn't be surprised to see a big chain go under before Christmas."

A decline in the number of mortgage products available and far tougher lending criteria have been two effects of the credit crunch. But with £37bn of government cash injected into three big banks and more money waiting in the wings if needed, shouldn't we be looking forward to easier lending?

Don't count on it any time soon, say the experts. The immediate reaction to the rescue package in terms of Libor, the rate at which banks lend to each other, has been underwhelming. "Libor has only come off a touch and is still far in excess of the Bank of England base rate," says David Hollingworth from broker London & Country.

But he reckons that the inter-bank rate will come down over the next few months. "People have got to be patient. It will take time for the government cash to seep into the system and for confidence to return and for them first to start lending to each other again and then later at a reduced rate."

When this does finally happen, though, will borrowers actually see any benefit? Gordon Swann, spokes-man for mortgage comparison site mForm.co.uk, doubts whether we will see significantly cheaper home loans or looser lending criteria, in the short term at least.

"Banks are now rebuilding their capital base, which means they will want a much bigger margin on their mortgages than in pre-credit crunch days. Take tracker deals. Before the crunch, these were only a very small margin – say 0.2 or 0.3 per cent – above base rate and didn't have high initial fees or redemption penalties. Now they are often more than a full percentage point above base rate and have whopping initial fees and some even have hefty penalties," he says.

Since the Bank of England cut the base rate by 0.5 per cent on 8 October, evidence of banks repairing their bottom lines has piled up. Many have either failed to pass on the rate reduction at all or only cut by a fraction. Most notably, Nationwide said last week that it would be trimming its standard variable rate by just 0.3 per cent.

The Government hopes that the stance of the lenders may prove relatively short term – just a reflection of the uncertainty of the past few weeks. It expects normal lending to start again soon.

The Council of Mortgage Lenders, though, reckons this hope is a non-starter. The housing market has ground to a halt, it says, so even if the lending taps were suddenly turned back on, there will be no return to the heady days of the property boom.

"The best the Government can hope for is that the banks it has lent cash to won't withdraw from the market altogether – that they will retain a competitive presence and actually lend to buyers and people looking to remortgage," says Mr Swann.

Mr Hollingworth thinks even this could be a slow process – a case of a "few months rather than a few weeks before real competition returns".

But Mr Hollingworth's "real competition" may look very different to what we have grown used to during the years of housing market boom.

"Lenders used to scrap over 90 to 95 per cent mortgages," Mr Swann explains. "For the next few years, this battleground will shift to deals where customers can put down deposits of 20 to 40 per cent."

This could have a profound impact on huge swathes of the population. "This is a real issue for those who bought in the past few years with a high loan to value," he says. "They could be in negative equity now, and if their home was revalued they may not be able to switch mortgage provider. They will have to stay where they are, even if their deal involves them being moved on to a higher standard variable rate."

With lenders becoming edgy over falling house prices, they are keener than ever to gain a true picture of a property's worth, adds Mr Swann. This could have another negative knock-on effect: "If lenders insist on more visits, the costs will rise and this could in turn lead to fewer free valuation deals being offered."

The overall picture is of a mortgage market that will take its time to struggle back to its feet – and when it does, things may not be the same again. But many believe a dose of reality and a reintroduction of old-fashioned values may be no bad thing. "It would be good if we could get back to the days when people needed to save a 10 per cent deposit before buying a home and income multiples of three or four times salary were the norm," says Mr Salmon. "What we need more than anything else is stability."

However, some suggest that far from stabilising, the mortgage market will get worse. "The last housing crash took five years to play out and we are only just in year one of the present one. And last time round we didn't have the potential for the collapse of the banking system," says Jonathan Davis, a chartered financial planner who has been predicting a 40 per cent slide in UK house prices.

Think-tank Capital Economics, meanwhile, has warned of a credit crunch part two, this time because of bad debts in the UK mortgage market.

"With unemployment rising and Britons massively over-borrowed, prices will fall further, although not in a straight line," adds Mr Davis. "I expect lenders to tighten their criteria again as they face the reality of dealing with a wall of bad debts."

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