Lending plans 'may put brakes on rates'


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The Independent Online

Plans to revitalise lending could put the brakes on rising mortgage rates but people who already find themselves shut out of borrowing are unlikely to see a dramatic change, analysts said today.

Household borrowing has remained sluggish in recent months with a trend towards people paying down their debts rather than taking out new loans amid the uncertain economy and tough employment conditions.

Mortgage lending plummeted in April, as the number of house purchase loans fell by 30 per cent month-on-month to 36,000 loans worth £5.3 billion, figures released yesterday by the Council of Mortgage Lenders (CML) showed.

The drop has in part been put down to the ending of a two-year stamp duty concession for first-time buyers in March, which lenders and estate agents say has distorted the market.

But lenders have also been tightening their borrowing criteria amid the weak economy and the continuing eurozone crisis, which has made it tougher for people to take out a mortgage and triggered a drop in the proportion of approvals.

They have also been raising their mortgage rates in recent months for both new borrowers and more than a million existing ones, blaming the increased cost of funding a mortgage.

Vicky Redwood, chief UK economist at Capital Economics, said that the new measures may simply act to stop rates rising further.

She said: "It will make a difference but it could just be that these measures stop mortgage rates and business rates from rising further, rather than bringing about falls.

"Banks have faced increases in costs which they haven't fully passed on yet."

Ms Redwood said that the intervention could possibly soften the blow of borrowing criteria becoming more restrictive.

But she added: "The question is whether banks want to lend more to households, when the outlook is so uncertain.

"I don't think we're suddenly going to see the tap fully turned on."

Bank of England figures showed this week that the typical rate being offered to customers for a two-year fixed rate mortgage with a 25 per cent deposit held steady at 3.66 per cent in May, following increases every month since October last year.

The rate for two-year fixed deals for people with just a 10 per cent deposit increased by 25 percentage points from April to 6.04 per cent, the highest rate since January 2011 and a figure which has also been steadily rising since last autumn.

Other types of household borrowing have also been weak. Credit card lending contracted by the biggest monthly amount since 2006 in April, with repayments outstripping new borrowing by £118 million.

There have also been signs that people are dipping into their savings to cover high living costs rather than taking out new credit.

Recent figures from the Building Societies Association (BSA) showed that withdrawals from accounts in April outweighed new saving for the fifth month in a row.

Savers have struggled to find accounts giving them real returns on their money following three years of record low interest rates.

James Cotton, marketing manager at mortgage broker London and Country Mortgages, said that just the announcement alone could give lenders a confidence boost.

He said: "I don't know whether we're necessarily going to see a lot more lending going on. Lenders are being very cautious about who they will lend to and how much of a deposit people have.

"I don't think it will necessarily change that, but it might help the price of mortgages come down a bit. There might also be a bit more of a choice of mortgages."

He added: "This is a scheme to counteract major problems. It could give banks a little bit more confidence, that even if things do go downhill with the eurozone, there is a bit of support there."