Mortgage Curbs Continue, But Don't Despair

The number of mortgage deals on offer continues to plunge. Then again, there are thousands of deals for those with a decent deposit.

Last March, I wrote Half Of Home Loans Are History. In this article, I warned that the ongoing credit crunch and falling house prices was forcing lenders to withdraw mortgage deals in their thousands. Alas, nine months on, this mortgage famine continues.

Indeed, according to Fool partner Moneyfacts, almost two-thirds (65%) of all mortgage products have disappeared in the past twelve months. During November alone, one in four mortgages (25%) was pulled. This forced contraction of mortgage ranges is putting first-time buyers and other homebuyers under great strain, as they must find ever-larger deposits in order to secure the cheapest deals.

Mortgages are being rationed

During the housing boom of 1995 to 2007, home loans were easy to come by, especially in the later years. In fact, lenders were so keen to throw money at anyone with a pulse that 125% and 130% mortgages were on offer. Today, these `negative equity' loans are dead and buried, along with their inventors, Northern Rock and Bradford & Bingley.

Nowadays, anyone looking for a reasonable interest rate needs a decent deposit, say, a tenth (10%) of the purchase price. As you can see from the table below, there are precious few mortgages available to those without a decent amount of cash (or existing equity) to put down:

Number of loans on offer

These figures clearly demonstrate the strong risk-aversion which currently exists among mortgage lenders. At the risky end of the lending scale, the number of no-deposit mortgages has collapsed by 96%, from 257 in November 2007 to just ten today. What's more, anyone after a 100% mortgage will face severe restrictions, with lending restricted to local areas and additional guarantees (such as from parents) required.

Likewise, for 5%-deposit loans, the collapse is near-total, from 1,126 loans to just fifteen. However, sensible homeowners should not despair, because there are still some terrific deals open to borrowers with a chunky deposit. In actual fact, the number of mortgages available only to those with a 40% deposit (for example, £80,000 on a £200,000 property) has risen more than tenfold. A year ago, only 21 mortgages fell into this category; today, the figure is 249.

Base-rate cuts and tracker mortgages

One thing I would stress is that the mass withdrawal of mortgages in November does not indicate the complete collapse of the mortgage market. Rather, it reflects the fact that the Bank of England base rate has been cut three times in three months. Thus, a dramatic fall in the base rate from 5% to 2% has forced mortgage lenders to withdraw and re-price their loans.

In particular, hundreds of tracker mortgages (which are tied to the base rate) were withdrawn in November. When re-launched, these mortgages include much higher margins over the base rate, in order to boost lenders' profits. Thus, a `base rate plus 1%' loan -- fairly common a year ago -- is likely to be priced at 1.5% to 2% over base rate today. In fact, the latest data suggest that spreads between standard variable rates and the base rate hit a record high last month.

The overriding message from the mortgage market is that lenders are desperate to avoid their previous mistakes. With house prices likely to fall throughout 2009, banks and building societies refuse to lend to homebuyers with smaller deposits, for fear that this equity could be wiped out as the housing slump continues. Hence, with limited funds on offer, lenders are turning their banks on risk by restricting their lending only to the safest borrowers.

After years of reckless lending, the balance of risk and reward is returning to normal -- and about time, too. Indeed, whatever threats the government makes, mortgage lenders are highly unlikely to return to the lending levels of 2007. In the last year of the boom, mortgage lending grew by over £108 billion, after taking repayments into account. By October 2008, this annual increase had more than halved to £49 billion. Frankly, I don't see this trend reversing strongly, no matter how many toys the Prime Minister and Chancellor throw out of their pram!

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