Borrowers seek freed-up funds

Borrowers with small deposits or little equity in their homes are unlikely to see any immediate benefit from the latest bank bail- out, as the freeing up of tens of billions of pounds of finance may not convince lenders to take on riskier customers.

Brokers do believe that the rescue plan announced by the government this week will do more to stimulate new mortgage lending than earlier attempts. However, they warn that any benefit could take many months to filter through to borrowers, and may not ease lending on higher loan-to-values until at least the end of the year.

Many borrowers have been unable to find a competitive mortgage deal in recent months, in spite of sharp falls in interest rates, as banks have been unable to access enough funding to take on new business.

Lenders have opted to boost profit margins rather than pass on the full interest rate cuts to new loans. Some have even delayed passing on the rate cuts to existing customers with tracker loans, which should automatically, and immediately, shadow cuts to the base rate.

BM Solutions this week wrote to customers to tell them they would not see the benefit of December’s rate cut in their monthly mortgage payments until March, if their payment is made during the first nine days of the month.

Some borrowers who have tracker mortgages with Barclays have not yet seen any reduction in their mortgage payments, either. Rather than lower customers’ payments when interest rates fall, the bank automatically allocates a higher proportion to repaying the capital of the loan. It only recalculates customers’ payment obligations once a year, unless the customer requests otherwise. Brokers said this kind of action from banks was unhelpful at a time when the government was taking drastic action to encourage lending and bring down costs for borrowers.

The government this week launched measures intended to revitalise the mortgage market. The Treasury agreed to guarantee new mortgage-backed securities, in an attempt to give banks more confidence to lend. It also offered to insure banks against large losses from risky debt, which should enable them to lend more capital, rather than hold it on their books.

Brokers said these proposals should go some way to helping tackle the main problem for borrowers: that, even though mortgage rates have started to come down, the best deals are reserved for the most desirable customers because banks have a finite pool of funds to lend out.

“The combination of measures has the potential to increase lending quite significantly,” said Ray Boulger at John Charcol.

However, brokers feared the huge sums of money being made available to lenders by the government could be swallowed up before they helped the borrowers who needed it most.

“The amounts the government is putting in are just not enough to solve this problem,” said Ian Gray, a broker at Largemortgageloans.com. He did feel, however, that the government would have more power to force banks to lend because of its greater involvement with them.

Boulger believed the extent to which terms would improve on higher loan-to-value mortgages would depend entirely on how much extra money was in the system. As banks have had limited funds, they have not had to take on higher risk customers. They have not passed on anywhere close to the full interest rate cuts to borrowers with deposits of 15 per cent or less. But if they gain access to more funds, they may be willing to do more lending in this area.

For customers with larger deposits, rates have already started to fall. Brokers expected lenders to bring out more competitive rates over the next few weeks as competition increases.

Borrowers could also see a greater presence in the market from Northern Rock, as the government encourages the nationalised bank to do more new lending and offer a better service to existing customers. Brokers expected Northern Rock to launch new mortgage deals, with more attractive rates or fee structures, within weeks. So customers coming to the end of Northern Rock deals may find they are offered competitive new rates to stay with the lender.