The weather in the property market is made by mortgage lending and, despite the Euro crisis, there are signs that mortgage availability could improve as the year goes on.
In recent months, the main mortgage lenders have been pulling in their horns; increasing interest rates, demanding higher deposits and otherwise tightening their lending criteria. Exposed to potentially large losses if European banks they have lent money to go bust or default, UK banks are trying to reduce their exposure to risk and hold on to what money they have.
But several events in recent weeks suggest that it’s not all bad news. New entrants to the market are starting to make their presence felt, competition among lenders will restrict the ability of some to raise rates and the new ‘Funding for Lending’ scheme from the Bank of England could pump as much as £80 billion in to the banks provided they pass it on.
Funding for Lending
Let’s start with the ‘Funding for Lending’ scheme which starts in August. The Bank of England will make up to £80 billion available to the banks at very low interest rates. Total outstanding mortgages currently amount to £1,252.5 billion, so that represents just under 6.5% of total mortgage lending.
There are two carrots designed to get the banks to pass this money on as loans (including mortgages). Firstly, the amount they can borrow will depend on the amount they lend. For every extra pound they lend, they can borrow the same amount from the scheme. Secondly, the interest rate charged by the Bank of England is so low that they should be able to lend it to home buyers at a handsome profit. And the banks need to make a profit right now to shore up their balance sheets.
Building Societies strike back
Just as (some) banks are trying to shrink their mortgage lending, building societies are expanding. The Building Societies Association says that in the first five months of 2012, lending by mutuals rose 40% compared to the same period in 2011. Over the same period, lending by banks rose just 8%.
That is consistent with data from the British Bankers Association (BBA) and the Bank of England. If you compare the number of mortgage approvals reported by the BBA with the total approvals recorded by the Bank of England, you can see that the banks share of new mortgage lending has slipped from around 67% at the end of last year to around 62% now. It’s not a huge change, but it is another sign that nnew lenders could appear to take up the slack left by the banks.
New lenders emerging
While building socieites seem to be growing their lending, a host of new potential lenders are readying themselves to enter the market. Tesco and Marks & Spencer have said recently that they plan to offer mortgages in the near future – both are major forces on the high street. Moreover, some existing providers are set to expand significantly. The Co-op is reputed to be buying 630 branches from Lloyds TSB, catapulting it in to the major league of British banking, and Virgin Money bought the remains of Northern Rock once the bad debts had been hived off. In short, there are a lot of new, or newly expanded mortgage lenders out there.
With more lenders comes more competition. That might explain why HSBC has just launched the lowest ever five year fixed rate mortgage (at 2.99%), although you do have to have a 40% deposit. Halifax has also recently cut the rate on its two year fixed rate mortgage and the Nationwide did the same a few days ago.
Of course, rates have risen this year as the cost to banks of borrowing money has escalated and these cuts don’t entirely reverse those earlier increases. It’s also true that it now looks as if any significant rise in interest rates is some time away, which partly allays fears that funding costs will rise in the future. But the cuts also reflect growing competition among lenders that should help to cap any increases and could prompt a gradual relaxing in lending criteria.
Euro collapse fears
There are likely to be some bumps on the way – the first estimates of mortgage lending in June don’t look good – but there is some prospect of a gradual improvement in lending later this year. That assumes, however, that the Eurozone does not go in to meltdown. If it does, who knows what will happen. Then again, an event of that magnitude would mean that mortgage lending would be the least of our worries.