Credit Conditions

by Mark Johnston

The Bank of England’s credit conditions survey is part of their mission to maintain monetary stability and financial stability through understanding trends and developments in credit conditions.

The availability of bank lending has remained unchanged in the first 3 months of 2012, according to the latest Bank of England credit condition survey.

There has been a recent increase in competition to gain market share and the market has already seen a raft of discounts and offers, with some lenders offering fee free mortgages and others cutting their rates.

However, the Bank of England has now announced that people can expect to see stricter mortgage policies from their lenders and also a reduction in the amount of credit lenders give to households in the second quarter of 2012.

Despite the base rate having remained at the historically low level of 0.5% for 3 years, lenders still say that credit availability will change.

One of the main reasons for this is the on going crisis in the euro zone, which could eventually be a key factor in whether credit dries up completely in the future.

Wholesale funding conditions have already been tightened since mid 2011.

According to the Bank of England along with the economic outlook expectations house prices are also expected to pull down on credit availability. This means that the trend in house prices will start to contribute in determining who does and does not qualify for a mortgage. For instance, lenders will be looking at how much the house is currently worth and how much it is expected to be worth in the coming months.

Data has shown that home loan approvals also fell to 48,986, their lowest in 8 months, which has prompted warnings from many brokers that conditions resemble the ‘dark days’ of the banking crisis in 2008.

Economists have said that this restricted credit to households ‘will do little to help the wider economy’.

Vicky Redwood, chief UK economist at Capital Economics has stated that “the overall message from the data was that weak bank lending is likely to remain a significant constraint on the economic recovery”.

New tougher regulations that are to be placed on lenders in the future such as, requirements to check all income and ensuring that borrowers can afford to pay under a variety of circumstances, may also essentially kill off the mortgage market for the foreseeable future.

Dominic Hennessy, director of independent mortgage broker, Just Us Mortgages, also added “as a mortgage broker, right now it feels like we have been whisked back in to the dark days of 2008”.

Unfortunately the limited availability of credit may also mean that the size of deposits may also again increase to reduce the risk taken by lenders each time a mortgage is approved.

Therefore high deposits and tough credit scoring look to be here to stay for the imminent future, meaning some buyers may therefore be forced to abandon their dreams of home ownership for good.

Mervyn King, governor of the Bank of England, said that “the financial sector is not back to normal and it will take a number of years before we are through all this”.

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