More money for mortgages

Billions of pounds of new mortgage finance is set to flow into the market over the next six months as the state-backed banks plan an aggressive return to lending.

Northern Rock this week pledged to lend an additional £14bn this year and next, while Royal Bank of Scotland (RBS) freed up a further £9bn. Lloyds Banking Group will also ramp up new loans. The extra funds should boost new lending this year by at least 10 per cent.

Brokers said the increased lending power of the state-backed banks will help address the main problem for the housing market: the severe lack of mortgage finance. Interest rate cuts have eased affordability, but many borrowers have been unable to find a new mortgage as banks have not had the money to lend.

“Getting more money in the system is the key thing,” said Ray Boulger at John Charcol, the broker. “The degree to which further Bank rate cuts will help rates is now fairly limited.”

In fact, the injection of more funds could do more to bring down mortgage rates than further interest rate cuts. It will create renewed competition among the state-backed lenders as all three will have additional money to lend. Boulger estimated that Northern Rock, RBS and Lloyds could between them do around 50-60 per cent of new lending this year. This, is turn, should increase the pressure on other active lenders such as HSBC, Abbey and Barclays to keep their mortgage rates competitive. The result should be a spate of new mortgage deals coming onto the market within months.

The state-backed banks have not yet outlined exactly where they will allocate the new funds but brokers expect more competitive rates on a range of mortgages, including those for borrowers with smaller deposits.

Northern Rock has signalled a return to the higher loan-to-value (LTV) market. The bank is likely to offer more affordable deals for up to 90 per cent of a property’s value, which should help frustrated first-time buyers.

Lenders have been reluctant to lend to borrowers with small deposits as they fear property price falls could push them into negative equity. Those that have remained in this market have charged premiums for high LTV deals. But if more lenders start competing and property price falls ease, these deals could become more attractively priced.

Boulger noted that if more loans were made available at higher LTVs, this would help kick-start the housing market.

Greater liquidity should also mean that more mortgages are available to borrowers with larger deposits. Recently, any attractive deals have been assigned a limited pool of funding, so once they were snapped up borrowers, they were withdrawn. If lenders have more money to allocate to good rates they should stay around for longer and be available to more borrowers.

But while there should be less volatility in rate movements, lenders will still be closely managing their lending volumes.

RBS said new loans would be made on “arm’s-length” pricing terms and criteria. This means the bank will set rates to achieve the volumes it wants and then could stop lending.

There is still pent-up demand for mortgages, say brokers. Boulger estimated that around 20 per cent of potential buyers have been excluded from the market as riskier loans have dried up. Nationwide yesterday increased some of its mortgage rates to quell demand.