Mortgage squeeze is tightening, Bank warns

Britain's mortgage squeeze is getting worse, the Bank of England warned yesterday as concerns about a fresh housing market slump continue.

The Bank's Credit Conditions survey said that banks' lending policies combined with the current economic conditions will continue to make it extremely tough for first-time buyers to secure mortgages over the next three months. The survey, which covers all the major lenders, said credit-scoring criteria, used to decide whether an applicant is worthy of a mortgage, have tightened up.

In a further sign that the supply of credit to the economy will be severely limited over the coming months, Paul Fisher, a member of the Bank's Monetary Policy Committee, warned that the "special liquidity scheme" for banks will not be extended when it expires at the end of 2012.

The scheme is important because it has provided funding to banks, in particular troubled banks such as Lloyds and Royal Bank of Scotland, which dried up from other sources during the financial crisis.

Analysts are worried about how those banks will replace the funding given that wholesale lending markets remain torpid and prone to seize up if sentiment takes a turn for the worse over issues such as Europe's sovereign debt crisis.

In his speech, Mr Fisher said that credit flow to Britain's economy remains impaired and could take years to fully recover, despite politicians exhortations to banks to lend and back an economic recovery.

The Bank, along with counterparts in Europe and beyond, nonetheless wants to stop banks using it as a crutch. "It [the scheme] will not be extended or replaced," Mr Fisher said. "After three years of large-scale liquidity support the Bank expects each institution to be able to fund itself through normal market mechanisms."

The state of the housing market is increasingly worrying policymakers. A continuing flow of data suggests that the recovery in prices that has been seen since they hit a nadir during the financial crisis has come to an end and is now moving into reverse. Confidence in the housing market feeds through into consumers' spending decisions and their sentiment is already weak owing to the forthcoming spending cuts and tax rises, which the Coalition Government plans to use to begin reining in Britain's budget deficit.

The Bank's credit report says that many lenders are predicting that the loan approval rate will fall in the fourth quarter (October-December), the first time this has happened since early in 2009. The 95 per cent mortgage rates required by many first-time buyers remain all but impossible to find – last week the Skipton Building Society withdrew its offering.

Many big lenders require deposits of 15 per cent, or even 20 per cent, of the value of a new house. The recent data on house prices has been contradictory, but most measures show either that prices are falling, or that they are poised to fall.

More positively, the amount of secured credit available to home owners actually rose in the past quarter. Some lenders have also indicated that there has an increase in credit for small businesses, according to the Bank's survey. Despite this, demand for home loans and credit card lending among householders dipped during the last quarter, though so did the proportion of people defaulting on credit.

The survey came a day after the Bank's lending figures showed UK consumers repaid more unsecured debt than they took out in new loans in August. Net consumer credit – including credit card borrowing, overdrafts and personal loans – fell by £120m, the biggest drop since November 2009.