Banks still reluctant to lend a hand to first-timers

BUYERS lured into the housing market by low prices are still struggling to secure affordable mortgages, undermining hopes of a housing market recovery.

Scottish house prices have fallen by over 10 per cent in the last year, despite a small rebound in recent months, and buyers have gradually returned to the market to take advantage before prices rise again.

But while lending levels have been on the increase for several months and are a distinct improvement on late last year, May saw the weakest growth in lending since 1993.

The number of mortgages approved by the UK's mortgage lenders rose by just 223 in May, some 3,000 below the expected increase and a tenth of the amount loaned in May last year, when the slump was already underway.

Lenders have now been accused of failing to support first-time buyers in particular by continuing to "cherry pick" the borrowers to which they are prepared to advance loans.

Richard Mason, managing director of Moneyextra.com, claimed that lenders are not responding to demand or to government encouragement to increase mortgage activity.

The number of products offered by lenders fell by 15 per cent in June, according to Mason, with fixed rate mortgage availability declining by almost a quarter.

"Banks initially cut back on lending because of the volatility in the property market which left them uncertain about the value of securities," said Mason. "However, given the housing market's recent stabilisation and a return in consumer confidence, we should be seeing the number of products rise, not fall."

Mason called on lenders to increase the flow of lending, particularly to first-time buyers. "This is critical to prevent the housing market from plunging into a deeper economic abyss; there is simply no reason for banks to hold back lending any longer," he said.

First-time buyers still need a deposit of at least 25 per cent if they want access to the most competitive mortgage finance, said Louise Cuming, head of mortgages at Moneysupermarket.com. "Any increased activity is for the 'favoured elite' who have equity, income and a proven and excellent credit track record. Until this changes and lending becomes much more inclusive, we will not see a recovery either of the mortgage or housing industries."

Figures produced for The Scotsman by Moneysupermarket (see table) show a dramatic decline in the availability of mortgage finance since a high point in the summer of 2007. The total number of available products has fallen from more than 30,000 to around 2,000, with first-time buyers hit especially hard.

The total number of products available to them has fallen from around 20,000 to approximately 1,000, according to Moneysupermarket.

"However, the position is even more serious, because first-time buyers are being forced into finding a 10 per cent deposit, which against an average purchase price equates to around £15,000," said Cuming. "On top of that, the choice at 90 per cent loan-to-value (LTV) has fallen off a cliff with average rates actually increasing against the Bank of England drop of 4.5 per cent."

But lenders have good reason to "cherry pick" borrowers, noted Katie Tucker, technical manager at broker Mortgageforce Scotland.

Under the government's new 'capital adequacy' laws, the higher the loan-to-value a bank or building society lends at, the more money it must have stashed away to counter the extra risk.

More lenders can now meet those capital adequacy levels, hence the small number of 85, 90 and even 95 per cent LTV deals made available in the last two months.

Yet this supply is not meeting demand because lenders are still being selective when it comes to borrower credit scores, said Tucker.

"They are able to change overnight how many points you would need for your mortgage application to be approved. Brokers are often tipped off by the lenders if they are relaxing the scores for a few days to get more customers signed up."

So, many first-time buyers are still being frustrated by restricted lending practices.

But lenders are gradually expressing more interest in opening their doors to more borrowers this year, Tucker concluded.

"People have saved some deposit and, importantly, feel that the economy may have hit the bottom and that it's safe to sell, which knocks on to buyers – good news is cumulative in this market."