Credit tap turned back on

Suddenly, it seems it has never been cheaper to borrow money, and it’s not just in the mortgage market. Julian Knight reports on whether this easy money for consumers is again brewing up bubble trouble

For many borrowers, the credit crunch is now nothing more than a distant memory. With the Government’s Help to Buy scheme igniting the first-time buyer mortgage market, credit card firms falling over themselves to get new borrowers signing on the dotted line and best-buy personal loan rates that are so cheaply priced they barely keep pace with inflation, things have clearly changed. So are we on the cusp of a new credit bubble – are consumers partying like its 2007?

Exclusive research for The Independent would suggest that consumers have never had it so cheap as far as money is concerned. The average two-year fixed-rate mortgage was 6.45 per cent in October 2007, a few weeks after Northern Rock went pop. Today the rate on this type of home loan is just 3.53 per cent.

And that doesn’t tell the whole story, as there is a bunch of lenders – big banks in the main – that are currently undercutting other lenders for new mortgage rates. As a result, it is possible to get a two-year fixed-rate loan from the Post Office for 1.98 per cent or a five-year fix from Yorkshire Building Society for 2.84 per cent. Those rates are all comfortably below the retail price index.

Buy-to-let mortgages are also as cheap as chips. After the crash, lenders rowed back on buy-to-let, figuring it was a vulnerable sector but a surprising thing happened the default rate on buy to let loans was actually lower than the general mortgage market.

As a result, buy-to-let is now viewed by many lenders not as high risk but as safe as, well, houses. More generally, a recent Bank of England survey on credit conditions showed that the past three months have seen a significant expansion of high loan-to-value mortgage lending, buoyed in part by the Help to Buy scheme.

It’s not just in the mortgage market that the credit taps are opening. Personal loans, having shot up in price during the credit crunch, are now falling back to 2007 levels, and best buy loans are below 5 per cent for the first time in living memory as competition hots up. 

Matt Sanders from comparison site notes  an uptick in personal loan borrowing: “According to Bank of England figures, non-credit card lending has risen by 3.7 per cent in the year to August. If you couple this with rising inflation and static wage figures, households do need to be careful not to overstretch their financial commitments.”

New entrants are key to this, according to Mr Sanders: “New companies like Hitachi Finance and peer-to-peer lender Zopa are fuelling a price war – this is particularly evident when you examine the rates that customers borrowing large amounts are being offered. But, these lower rates are only being offered to customers with the strongest credit file, so this is suggesting that lenders have tightened their lending criteria.”

The driver of all this lending largesse is the Bank of England’s Funding for Lending scheme. Launched last year, it has seen lenders able to secure new capital from the BoE, provided it was used for new consumer and business lending. 

It is a licence to print money for the lenders: “Following its launch, lenders have once again been competing for business, and we have seen rates across the board falling back,” Stuart Gregory, managing director of Lentune mortgage consultancy, says.  

Jonathan Davis, a certified financial planner who predicted in the press the financial crash, says the Government and the bank are playing with fire: “By intervening in this way – to win short-term votes – they are bringing medium to long-term pain and devastation to our economy, savers and the poor in society.”

But talk of a credit boom may be way too premature. For starters, house sales are still only two thirds of the levels seen in 2007. Lisa Williams, managing director of mortgage advice firm Keys UK, points out that whereas headline rates seem very low, they come with major strings attached.

“Funding for Lending is predominantly behind the cheap rates but criteria is still tight unlike 2007, there are no self-certificate mortgages, repayment dominates interest-only loans, income and affordability checks are strictly made so I don’t see the same credit conditions ensuing as in 2007,” she says.

What’s more, business leaders would probably scoff at the idea of there being another credit boom. Any improvement in business lending has been much slower and patchier than is the case for consumers.

“The gulf between consumer and business lending is getting wider –  and risks causing a dangerous mismatch in the economy,” Louise Beaumont, the founder of the alternative finance provider for business Platform Black, says. 

Ms Beaumont adds that this mismatch could lead to the sucking in of imports as business fails to meet domestic demand.

“Banks have greatly relaxed their consumer credit conditions, and surging mortgage and credit card borrowing are stoking the fires of a demand-driven recovery,” she says. “But bank lending to business is increasing at only a glacial pace, and as Britain’s businesses race to keep up with runaway consumption, they could easily be tripped up by a lack of finance.”

Judging by the millions of Britons who are falling prey to payday lenders, with their four-figure annual percentage rates, it seems that the personal UK credit market may never have been as divided as right now.  Have a good credit rating, a decent job and keep up your repayments, and money has never been cheaper. Be a struggling small business or an individual who has an uncertain income and the opposite may well be true.