Borrowing to become more expensive

Borrowing is set to become more expensive in the coming months as banks pass on their increased funding costs, a Bank of England report warned today.

Mortgage availability for borrowers with small deposits is also expected to "decline markedly" and lenders' credit scoring criteria are likely to tighten further, the Bank's quarterly credit conditions report said.

More than a million home owners have already seen their mortgage rates increase due to a string of lenders putting up rates, blaming the weak economy and increased costs, and mortgage rates for new borrowers have also been steadily increasing.

The proportion of mortgage approvals fell "significantly" in the three months to the end of May, following a tightening of borrowing criteria by some lenders, and approvals are expected to decline further, the report said.

Apart from people looking for a high loan-to-value (LTV) mortgage, often seen as a riskier option for lenders, the availability of mortgages generally is thought likely to remain unchanged going into the autumn despite the increase in borrowing costs.

Recent Bank of England figures showed that the typical rate on offer for two-year fixed mortgage deals with a 10% deposit increased by 25% from April to 6.04% in May, the highest rate since January 2011 and a figure which has been steadily rising since last autumn.

Lenders said that demand for mortgages increased sharply in the run-up to the ending of a stamp duty concession for first-time buyers in March, and they expect overall demand to remain steady over the next three months.

The total amount of other types of non-mortgage loan made available to households increased slightly, and lenders loosened their credit scoring criteria for credit card lending.

Demand for credit card borrowing has dropped off in recent months, while demand for other types of personal loan has increased. But this pattern is expected to reverse in the coming months, with an increase in the demand for credit cards and a decline in people taking out other types of personal unsecured loan.

Credit card limits are expected to increase in the coming months as the overall ability of unsecured credit, which includes personal loans and overdrafts, widens.

The report said lenders have been "positively surprised" at lower-than-expected default rates for households and firms, despite the tough economy.

A decrease in default rates for non-mortgage household lending has been seen in the past three months, and follows 10 consecutive quarters of falls in default rates.

Vicky Redwood, chief UK economist at Capital Economics, said the Treasury and Bank of England's recently announced funding for lending scheme could help to offset some of the expected borrowing hikes.

She cautioned: "But with the economy probably still in recession, banks may remain reluctant to lend, while firms and households may not want to borrow."

While borrowing is expected to become more costly for firms of all sizes in the coming months, competition between lenders to attract the best-performing and largest firms has kept some loans cheaper, despite banks' increased funding costs.

Demand for credit from small firms has increased, but it remains "weak" for large and medium-sized businesses, the report said.

Credit availability to firms of all sizes is predicted to remain unchanged in the next few months and demand from medium-sized firms is expected to pick up. Demand from larger firms is expected to fall slightly and remain broadly unchanged for smaller firms.

Firms' "subdued" demand for credit was put down to a range of factors such as uncertainty stemming from the ongoing eurozone crisis and a lack of merger and acquisition activity and investment.

The report regularly asks lenders about credit conditions over the past three months and the coming three months.

PA