Small societies restrict lending

A local building society for local people

The turmoil in the financial markets has led several small building societies to restrict or even halt fresh mortgage lending.

The Bath and the Earl Shilton have withdrawn all their deals, except those at their standard variable rates.

Three others - the Newbury, Melton Mowbray and the Tipton & Coseley - are only lending to local people.

All have been swamped by demand after bigger lenders found funds hard to come by on the financial markets.

The Bath building society said it now had too many customers to deal with.

"We have simply been inundated with mortgage applications and inquiries in the last few weeks," said the chief executive Dick Jenkins.

"We want to preserve the level and quality of service we offer our customers and we simply can't do that if we have far too many applications to process," he added.

Local people

The Tipton & Coseley said the fact it was still offering 95% mortgages meant it had been attracting interest from customers unable to obtain mortgages elsewhere.

The smaller building societies... can find a load of business suddenly coming their way at an hour's notice Adrian Coles, BSA

"We were getting a lot of calls from around the country and we wanted to make sure that people locally can get them," said the society's Chris Martin.

"Lenders are withdrawing rates and increasing them and limiting the percentage they will lend on.

"We are a bit loath to do that and it is to make sure we don't have to that we are restricting borrowing to people in our area," he added.

Mortgage deals from many lenders are appearing and then disappearing at a much quicker rate then before.

Adrian Coles of the Building Societies Association admitted this was a problem.

"The financial markets are so volatile it is difficult to raise money in the wholesale markets which is causing difficulties for the big institutions," he said.

"The smaller building societies which have a very prudent business model and which are not raising money from the wholesale markets can find a load of business suddenly coming their way at an hour's notice."

The Bath building society said its product range would probably be restored within a couple of weeks.

Drying up

The drying up of funds in the financial markets has already led to the crash of one of the country's biggest mortgage lenders, Northern Rock.

But the effects of the crisis are turning out to be more widespread.

All lenders are now much more cautious about who they will lend to - both to their public customers and also to professional ones in the financial markets.

That has led directly to the disappearance of mortgages worth more than 100% of a property's value.

And some lenders are now reluctant to lend more than 90%.

The Council of Mortgage Lenders has already warned that the "mortgage tap" could be turned off this year.

Lenders expected to fund a third of their lending by borrowing from other financial institutions on the financial markets, but this source of funds has now dried up.

The economics consultancy Capital Economics - which has long argued that the housing market in the UK was a bubble waiting to burst - warned that the drying up of funds might lead to a downward spiral of falling house prices this year.