Page last updated at 11:50 GMT, Tuesday, 11 March 2008

Home loans tumble to record low

Prospective home buyer
Some home buyers are now being frozen out of the market

The mortgage market is shrinking under the impact of the continuing problems in the banking system, say lenders.

Figures from the Council of Mortgage Lenders (CML) show that new loans for home buyers fell to 50,300 in January, the lowest level for nine years.

That was 11,700 fewer than in December and 25,500 fewer than in January 2007.

The CML also said that lenders' tougher loan criteria were forcing borrowers to put down larger deposits and accept smaller mortgage offers than before.

"The wholesale funding markets remain largely closed and mortgage funding still remains constrained," said the CML's director general Michael Coogan.

The credit crunch is now having a meaningful impact on the availability of finance for home purchases
Simon Rubinsohn, Rics

"This is now having a discernible impact on lending criteria and the ability of first-time buyers to get into the housing market," he added.

Fewer loans

The number of new loans being taken by house buyers is just under half that lent a few months ago in August 2007, when there were 103,000 such loans.

The dramatic decline reflects the fact that since the financial crisis that struck the banking system last summer, lenders have been finding it very difficult to raise funds from other financial institutions to offer as mortgages to their customers.

As a result lenders are becoming much more choosy about who they will lend to, and the terms they will offer.

The CML has previously warned that this would lead to the mortgage "tap" being tightened, with lenders facing a potential shortfall of between 30bn and 45bn in the funds they require.

"The credit crunch is now having a meaningful impact on the availability of finance for home purchases," said Simon Rubinsohn of the Royal Institution of Chartered Surveyors (Rics).

"Not only are the volume of mortgages falling sharply but loan to value ratios are also being reduced," he added.

Bigger deposits

The CML figures show that in January the average loan taken by a first-time buyer dropped from 117,921 to 115,000.

The knock-on effect was that the average loan as a percentage of the purchase price fell for the first time since early 2005, from 90% to 88% .

And as a multiple of income, the average first-time mortgage dropped back from 3.38 to 3.32 times income.

A similar picture exists for home movers who are also having to put down bigger deposits.

The average mortgage granted to these customers in January dropped from 137,499 to 134,100.

Likewise, their loans as a percentage of their house price dropped from 73% to 70%, and the typical income multiple for their mortgages dropped from 3.04 times average earnings to 2.97.

Slowing prices

Meanwhile the government's own house price survey shows that house price inflation continues to slow down.

The survey for January, by the Department for Communities and Local Government (DCLG), shows house prices were rising at an annual rate of 8% that month, down from a revised rate of 8.4% in December.

That meant the average UK house price was 221,758.

"England, Scotland and Northern Ireland saw decreases in house price inflation in January 2008," said the DCLG.

"Wales, though, saw an increase in house price inflation from 5.9% in December to 7.4% in January," it added.

House price inflation was highest in London, and went up there during January from 12.2% to 13.8%.

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