£37bn bank rescue package should boost mortgage market

The Government's £37 billion rescue package for the banks should inject life into the UK's beleaguered mortgage market.

One of the conditions of the funding lifeline is that banks increase their lending to individuals and small businesses to at least the level seen in 2007.

The groups involved must also commit to making competitively priced deals available and to actively marketing them.

Further details on what measure of lending the Government will use were not available, but it is expected to be net lending, which strips out people who are remortgaging.

Net mortgage lending to individuals reached £108 billion in 2007, but it was previously forecast to be half this level at just £55 billion in 2008.

Only £32 billion of net lending was advanced during the first six months of this year and in August the figure slumped to a record low of £143 million - just 5% of the previous month's total.

There were also no further details on what precisely the Government meant by competitively priced products, but people close to the discussions said this was likely to mean that banks should offer a full range of mortgages, rather than that their product range and margins should be the same as in 2007.

This is likely to include mortgages with higher loan to value ratios to help first-time buyers, although with house prices currently falling, it is highly unlikely that there will be a return of 100% mortgages, as buyers will need some equity to cushion them in the current market.

In July 2007, before the credit crunch first hit, there were 15,599 different mortgage deals available, but today that has slumped to just 3,249.

Within this today 1,079 were for people with just a 5% deposit in July last year, compared with only 53 today.

Under the terms of the Government deal, lenders must also support schemes to help people struggling with mortgage payments to stay in their homes, including putting money forward for shared equity and shared ownership schemes for those facing repossession.

While the conditions outlined only apply to the three banks taking part in the scheme, it is thought the bailout will have a positive impact across the mortgage market.

The key inter-bank lending rate three-month Libor is expected to fall today on expectations that the package will get the mortgage market moving again, which should lead to reductions in the cost of tracker mortgages for new customers.

Ray Boulger, senior technical manager at John Charcol, said: "If this opens up the market as it ought to do, that should increase the amount of lending that other banks can do.
"I would expect to see three month Libor fall back and that should mean that some of the banks will cut back their tracker rates."

He added that if mortgage products were not competitively priced, it would be very difficult for the banks to increase their net lending to 2007's level.

But the Council of Mortgage Lenders said it doubted whether, in the current market with falling house prices and reduced demand, it would be either "prudent or desirable" for lending of this level.

It said: "The CML assumes that the reference is a more generic aspiration to achieving a broad, deep mortgage market in general with a good spread of products enabling access to the mortgage market for all credit-worthy borrowers - and this would be an aspiration that the CML wholeheartedly supports."