Page last updated at 13:20 GMT, Monday, 5 January 2009

Mortgage rationing gets tougher

For Sale signs
Property sales and prices slumped in 2008

Mortgage lenders are continuing to demand larger deposits as they ration home loans to their customers.

In the past month the proportion of new mortgage deals requiring at least a 25% deposit has risen, from 54% to 60%.

And 25% of all deals on offer in fact require a 40% deposit, according to the information service Moneyfacts.

The Bank of England revealed last week that banks and building societies expect to rein in their lending even more in the coming months.

"The number of deals available for those with a deposit of 25% or more continues to increase as the lenders are looking to cherry pick the best customers, said Michelle Slade of Moneyfacts.

"Worries over falling house prices and the potential of customers getting into negative equity has caused the number of deals for customers with just a 10% deposit or less to fall to an all-time low."

Bigger premiums

There are now just 21 mortgages available with a deposit of 5% or less, compared with the position at the beginning of last February when there were more than 1,200 on offer.

Someone with a small deposit has to pay a much bigger premium on their interest rate and they are also shut out from some of the most attractive deals
Ray Boulger, John Charcol

The credit crunch and subsequent shortage of mortgage funds has produced a similar collapse in the number of home loans where lenders ask for a 10% deposit, once the traditional down payment.

These have fallen from nearly 1,200 at the start of February 2008 to just 148 now.

At the other end of the scale, the number of deals that need a minimum 40% deposit has shot up from just 24 to 341.

Ray Boulger, of mortgage brokers John Charcol, said life had become much tougher for people who could only put down a small deposit.

"The spread between the interest rate you pay if you have a small or a big deposit has widened considerably," he said.

"Someone with a small deposit has to pay a much bigger premium on their interest rate and they are also shut out from some of the most attractive deals, such as tracker deals," he added.

Falling prices

The UK property market shrivelled in an unprecedented fashion during 2008, as the dearth of mortgage funds shut off the flow of buyers and pushed down sales and prices.

0% deposit - down from 182 to 10
5% - down from 1,023 to 11
10% - down from 1,197 to 148
15% - down from 245 to 227
20% - down from 243 to 158
25% - down from 669 to 447
40% - up from 24 to 341

Sales volumes are currently about 60% lower than a year ago while prices, according to the latest Halifax survey, fell by 16% in the course of last year.

And the number of new mortgages approved for house buying in November was 67% lower than a year ago, according to the Bank of England's latest figures.

As such they suggest that sales will fall further in the coming months.

And all experts and commentators are united in their view that prices will also keep on falling for the time being, possibly even into 2010.

So far there is no evidence that any recent government attempts to inject fresh funds into the banking system have yet fed through to mortgage lending.

The chancellor Alistair Darling is considering a proposal put forward by Sir James Crosby, the former boss of HBOS, that the government should agree to guarantee 100bn of fresh mortgage lending by the banking industry.

But no decision on that plan is expected until the next budget.

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