Banks expect to reduce mortgage lending

Mortgage availability will continue to fall as lenders tighten their criteria in the face of rising defaults, the Bank of England has said.

The Bank of England's Credit Conditions Survey found that a net balance of 47 per cent of lenders had reduced mortgage availability during the three months to mid-June, with a balance of 22 per cent anticipating further cut backs going forward.

The main issue driving their reluctance to lend was the worsening economic outlook and house price falls, although the cost and availability of funds due to the credit crunch and a reduced appetite for risk were also factors.

Default rates on mortgages rose by slightly more than lenders expected during the period as households struggled to meet repayments due to the economic downturn.

Banks also said losses on these defaults were also higher than had been anticipated, although they added that the rise was from a low base.

The situation is set to continue to worsen going forward, with a balance of 52 per cent of lenders expecting losses on secured lending continuing to rise.

Lenders also reported reduced demand for mortgages for house purchase from consumers, with demand expected to tail off further in the coming months.

Recent figures from the Bank of England showed that mortgage approvals for house purchase in May had dived by 64 per cent compared with the previous year.

But demand from people remortgaging was strong, with this likely to continue in the coming months, although some lenders attributed this increase to the withdrawal of products by other players who are not represented in the Bank of England's survey.

Mortgage margins continued to increase during the past three months, contributing to the cost of the average two-year fixed rate deal recently hitting an 11-year high, although lenders expect their spreads to remain broadly unchanged going forward.

© Independent Television News Limited 2008. All rights reserved.