Halifax Axes More Mortgages

If you want to borrow from the UK's largest mortgage lender, then bring a big deposit. From Monday, only good risks get good rates!

HBOS group, which includes the Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance, is the UK's largest mortgage lender. In total, it has a market share of a fifth (20%) of all mortgage lending. Thus, where the mighty HBOS goes, the rest of the mortgage market usually follows.

The bad news for first-time buyers home-movers and those looking to remortgage is that, from Monday, 7 April, Halifax, Bank of Scotland and Intelligent Finance will raise interest rates for mortgage borrowers without a 25% deposit. In other words, if you don't have savings or existing home equity of a quarter of the purchase price of a new property, then you'll pay higher rates.

For borrowers with large deposits, rates will be trimmed by about 0.1% a year. Alas, for borrowers on the margins of affordability, the picture looks grim. HBOS has withdrawn its 97% mortgages, which required only a 3% deposit. Its interest rates now fall into four categories:

 deposits over 25% (loans under 75%) get its most competitive rates;

 deposits of 25% to 10% (loans of 75%-90%) get the next-best rates;

 deposits of 10% to 5% (loans of 90%-95%) pay the highest rates; and

 deposits under 5% don't get a mortgage at all!

HBOS is following in the footsteps of Nationwide BS, which bumped up mortgage interest rates in February for applicants unable to put down 25%. The good news is that HBOS reckons that over around seven-tenths of applicants have deposits of 25%+. Thus, only three in ten new customers will be affected by its rate hikes.

Although these latest rate hikes are fairly modest (0.35% a year at most), they are clearly a sign of more to come. Indeed, since peaking at around 14,000 last year, the number of mortgages listed in the Moneyfacts database has fallen below 4,300. In other words, seven out of ten mortgages have vanished, thanks to the worldwide credit crunch.

Why turn customers away?

The big question is why are mortgage lenders rushing to withdraw products, tighten lending criteria and turn away applicants? The simple answer is that, in common with other banks, HBOS is struggling to raise money in the frozen inter-bank lending market. Thus, it is cherry-picking the best customers, who are seen as low-risk and whose loans are unlikely to turn bad.

Furthermore, the UK's mortgage lenders-for so long the biggest cheerleaders for the housing boom-are getting very nervous about future house prices. Indeed, Nationwide BS recently changed its tune by predicting that the UK average house price would fall by 5% during 2008. Obviously, lenders are worried that falling prices could see the return of negative equity (when a home loan is larger than the property on which it is secured).

In addition, lenders are forced to rein in their lending because their capital bases are shrinking. Massive losses in the US subprime mortgage market have seen banks worldwide rack up losses in excess of $100 billion. These WMDs (Weapons of Market Destruction) have blown up a lot of banks' spare cash, forcing them to restrict their lending.

So, things are looking pretty grim for banks, which explains the large drops in their share prices-most big banks have seen their share prices halve since last spring. Equally, the outlook is grim for borrowers who are unable to borrow at reasonable rates from mainstream lenders. And, of course, the convulsions in the credit market will hit house prices, as the supply of mortgages dries up.

In the US, house prices are down more than a tenth (10.7%) on average over the past twelve months, with further falls predicted. Who knows how bad it will get on this side of the Atlantic? I, for one, won't be leaping back on the property ladder this year-or in 2009, most likely!

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