UK home loans plummet as first time buyers and buy let investors can’t get finance

Home loans in the UK have plummeted as mortgage availability tightens and rates rise despite the property industries attempts to encourage more first time buyers to kick start real estate market growth.

Mortgage approvals for home purchases fell sharply to 43,450 in March, their lowest level since December 2010, according to the latest Mortgage Monitor from e.surv chartered surveyors, as increasing funding costs forced banks to reduce their lending to borrowers with small deposits.
There were 7% fewer purchase approvals than in March last year, the first year on year fall since May 2011. The drop also represents an 11% fall on the number of approvals in February. It is the second successive month in which approvals have fallen, suggesting the market is beginning to regress after a period of growth.
The fall was driven largely by a sharp drop in lending to first time buyers. Loans for purchase of the cheapest property, typical first time buyer homes, fell 14% in March to their lowest level for 15 months. There were only 10,428 loans approvals on property worth up to £125,000 in March, down from 12,247 in February.
First time buyers were the hardest hit as banks reduced the availability of high loan to value mortgages in response to increasing funding costs and tightening credit conditions. Tighter criteria on high loan value mortgages meant lending to borrowers with a deposit of 15% or under accounted for only 10% all loans in March, well down on the three month average of 13%, and falling from 12% in February.
March was the fourth consecutive month in which lending to borrowers with small deposits has declined. There were only 4,432 loans to buyers with a deposit of 15% or under, compared to 5,829 in February, a fall of almost a quarter.
Banks lent disproportionately more to wealthier borrowers, reflecting their reduced appetite for lending to higher risk borrowers with small deposits. Despite the steep fall in overall approvals, the number of loans for purchase of homes worth over £350,000 held steady and even increased in some price brackets. Lending to borrowers with large deposits was its highest since January 2011, with one-third of all loans for home purchases in March granted to buyers with a deposit of over 40%, indicating the disproportionate influence of wealthier buyers on the market.
‘Up until now high street mortgage lenders have been able to absorb steadily increasing costs, rather than passing them onto the consumer. The tactic boosted activity during last autumn and early part of this year, albeit artificially, and veiled a multitude of underlying weaknesses in the market. Now that the banks can no longer afford to take on extra costs, those weaknesses are beginning to come to bear once again,’ said Richard Sexton, director of e.surv’
'A challenging period lies ahead, particularly for buyers on low incomes and with small deposits. Mortgage lenders’ balance sheets are groaning under the weight of increased funding costs and it is no surprise that a range of banks are changing their SVRs. In the Bank of England’s latest survey of credit conditions, the banks reported a fall in mortgage credit for the first time since spring 2010. As a result, banks are tightening their criteria and putting up rates on some of their fixed term mortgages. We are also seeing a severely weakened appetite for interest-only mortgages, driven in part by focus from the Financial Services Authority on the sustainability of these mortgages in the longer term,’ he explained.
‘Mortgage availability will continue to fall in the next three months, and banks have admitted borrowers with small deposits will be hit the hardest.  This has already begun to happen, with markedly fewer loans in March to first time buyers and a sharp drop in high loan to value lending,’ he added.

According to Mark Abrahams, chief executive officer of West One Loans, the sharp fall in loans during March isn’t a flash in the pan phenomenon. ‘Lenders have reported a fall in mortgage credit for the first time since spring 2010, due mainly to the increasing funding costs, which looks set to last well into the summer. High street banks have reported an increase in demand for mortgages this year, but have admitted they won’t be able to cater for it,’ he said.

‘First time buyers will suffer as will buy to let investors. Buy to let lending will fall with loans on cheap properties without kitchens or bathrooms hit hardest despite sky high demand. Brokers should take heart that this should fuel the bridging sector: it will encourage more investors to use bridging loans to finance projects,’ he pointed out.

‘We’ve noticed some impact already. The ratio of residential lending to commercial lending has been increasing steadily year on year in favour of residential, reflecting the increasing demand from buy to let investors for bridging finance. Some 84% of all loans in 2011 were to residential investors, compared to 77% in 2010. These figures suggest that is set to increase again this year,’ he added.