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Lower income borrowers in UK hit as property market sees lending tighten

The latest monthly report from e.surv shows that purchase approvals fell from 50,967 in September to 50,382 in October, a 1.1% decline. Although approvals rose 6.7% year on year but 2010 was a relatively weak comparator.

The month on month fall was triggered by the tightest lending conditions seen since February, it says. The average deposit size was 40% in October, with lower income buyers struggling to meet criteria for high loan to value (LTV) products.

Loans with a deposit of 15% or under accounted for less than one tenth of all lending in October, compared to almost a quarter in 2007. Lenders are targeting low LTV borrowers because of their fears over restricted credit conditions, and the protracted crisis in the eurozone.

This has sparked a fall in the number of lower income buyers, with purchase approvals falling fastest in the cheapest property brackets. Loans for purchases below £250,000 fell from 36,187 in September to 35,772 in October.

Loans with a deposit of 10% or under, a typical deposit size for first time buyers, accounted for just 1% of total lending for house purchases in October. By way of contrast, this figure was 13% in October 2007.

The overall decline was cushioned by consistent activity in the wealthier price brackets. The number of loans for properties over £375,000 remained stable thanks to wealthier buyers’ greater immunity to tightening lending conditions, mainly due to their larger supply of equity. As a result, these wealthier buyers continue to represent a disproportionate share of the market.

Loans for home purchases in London fell 13% on a non-seasonally adjusted basis. This followed an unusually strong September when approvals jumped 20%. The decline was triggered by a sharp fall in loans for purchase of expensive property.

Despite this, the number of approvals for first time buyers in London increased markedly, bucking the national trend. Loans on property below £250,000, typical first time buyer homes, accounted for 64% of all purchase approvals, shooting up from 42% in September, and up from 43% in October 2010.

The increase came despite the average LTV falling marginally from 59% to 58%. The larger pool of wealthier buyers in London means the capital is less reliant on high LTV lending than the rest of the country. Loans with a deposit of 15% or under accounted for just 4% of all purchase approvals. Buyers in London typically have larger deposits so don’t require access to higher LTV products, and because even a small percentage deposit represents a very large sum due to higher house prices in the capital.

‘With perhaps the notable exception of buy to let lending, lenders are in no position to begin growing their loan books in the current climate, although noises coming from some sections of the market would have you believe otherwise. Credit conditions are sclerotic, and banks are under intense pressure on capital. The market is actually showing remarkable resilience against the economic tidal waves battering our shores from the eurozone,’ said Richard Sexton, director of e.surv.

‘Banks are becoming more cautious, having upped their high LTV lending over the summer in a bid to increase their market share. They are now focusing on wealthier borrowers. It looks like they are still pushing high LTV mortgages, but the truth is the criteria are so strict, most first time buyers aren’t eligible. These tightening credit conditions are threatening to widen the vacuum at the bottom of the market,’ he explained.

‘That vacuum is being filled by wealthier buyers and buy to let investors, who are propping up the figures. They are being seduced by excellent value fixed rate mortgages and high rental yields. Lenders are now falling over themselves trying to offer the lowest fixed rate deals, which is great news for borrowers who can build the deposit required to access these great rates,’ he added.