Mortgage lenders batten down the hatches

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A year ago, when house prices were booming and money was freely available in the capital markets, banks were falling over themselves to lend to customers.

Not any more. Since the credit squeeze began nine months ago, the number of mortgages on offer to consumers has dropped dramatically as banks have struggled to access wholesale funding.

And the problem seems to be getting worse. In the past week, Britain’s biggest lenders have started to apply more stringent criteria to mortgage approvals, rejecting riskier borrowers and turning away those with a blemished credit record. Some competitive products have been withdrawn to avoid being flooded by new applications.

The action of the banks has partly been triggered by worsening conditions in the money markets, where funding has become more expensive and where the London Interbank Offered Rate (Libor) – the rate at which banks borrow in the market – recently hit 6 per cent.

All banks and building societies rely to some degree on wholesale funding to finance new home loans and they have been passing on the more expensive funding to their customers.

The funding pressures also mean that some lenders have withdrawn from the market altogether, and mortgage brokers estimate that £50bn ($100bn) of capacity has been taken out from what was a £360bn UK mortgage market.

Ray Boulger, technical director of Charcol, the mortgage broker, said: “There is still demand from borrowers even though housing transactions are expected to be reduced this year. However, the supply of mortgages has become scarcer.”

The squeeze comes at a time when an estimated 2.75m people are due to remortgage in the next year. HBOS, the UK’s biggest mortgage lender, has forecast that the average borrower taking out a new deal will pay £96 a month more.

The woes of newly nationalised Northern Rock are compounding the situation. The Newcastle bank took one in five of all UK mortgages in the first half of 2007. Now it is encouraging 60 per cent of borrowers whose mortgage is up for renewal this year to leave.

Another consequence is that banks have been swamped by new applications from people wishing to remortgage. To ensure they are not overwhelmed, some banks have increased their prices.

Nationwide, the UK’s second largest mortgage lender, and Cheltenham & Gloucester, part of Lloyds TSB, have increased interest rates on some tracker mortgages.

This week First Direct, part of HSBC, was forced to close to further customers until it clears the backlog of new applications. The Co-operative Bank has withdrawn its two-year mortgage range after seeing huge demand.

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Need a new loan? ... Here’s how

• If you are coming to the end of a cheap, fixed-rate deal start looking for a new mortgage as early as possible. You can reserve a rate up to six months before you actually need to remortgage, writes Sharlene Goff.

• Talk to a mortgage broker. They often have advance warning that rates are being withdrawn so they could help you find a deal that is not about to disappear.

• Once you find a good deal, secure it with your lender or broker immediately. Lenders are pulling rates at very short notice so even a day’s hesitation could mean you miss out.

• Pay any reservation or valuation fee up front rather than adding it to your loan. Once the lender has accepted these initial fees it should not be able to refuse to provide the rate.

• Check your credit rating in advance and take action to clear up any missed payments. Any failings on your record could delay your mortgage application and, as rates are being withdrawn so quickly, mean you miss the best deal.

• If possible, try to reduce the size of your mortgage. A lower loan-to-value ratio gives a better chance of a competitive rate.

• Apply online to speed up the process.

• Look at the lender’s standard variable rate as well as the initial deal rate. The SVR is the higher rate you will revert to after the offer period elapses. As it becomes tougher to remortgage, more borrowers could find themselves locked into SVRs. Lenders can choose their own SVR so they vary significantly in price.

• If you cannot find a new affordable rate you could temporarily switch to an interest-only mortgage. This will reduce monthly payments but will mean you stop repaying the capital on your mortgage.

• Think carefully about the type of mortgage you choose. Tracker rates are typically more expensive than fixed-rates but if base rates are cut, trackers will benefit. Also consider if it is worth paying a higher arrangement fee to secure a lower interest rate.

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