Another day brings another shuffle in the mortgage market, taking home loans further out of reach.
The UK’s largest mortgage lender, Nationwide, will reduce it’s maximum loan-to-value (LTV) to 90% on Thursday, on all of its products for new borrowers except its three-year fixed rate mortgage and its three-year tracker, where a 5% deposit is required.
The building society
is also cutting its maximum loan size from £1 million to £500,000, and only offering its standard variable rate mortgage to customers who can stump up a 25% deposit.
mortgage of 6.24% has proved popular recently because it had become cheaper than some of its fixed and tracker-rate deals.
Nationwide's divisional director for mortgages, Matthew Carter, said: "These changes will allow us to maintain control of the volume of business the Society is attracting, while enabling us to continue offering our full range of mortgages to our existing members in a controlled and prudent way."
Yet the news will come as a huge blow to borrowers who are already struggling to find a mortgage in the shrinking market. Nationwide says existing borrowers will not be affected by the changes and will continue to have access to all products up to 95% LTV, yet those with less than 5% equity will find it difficult to remortgage because large LTV loans have become very thin on the ground.
Meanwhile, Abbey has announced plans to tighten the criteria surrounding interest-only loans. From today, those wanting to take out or switch to an interest-only loan in order to reduce monthly repayments by repaying just the interest and not the capital of the loan – will need equity worth at least 50% of the property’s value.
The moves come as lenders are increasingly reluctant to lend against a backdrop of falling house prices. Figures released from the Land Registy yesterday show house prices fell by 0.4% to an average £184,798 in March.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "Despite the Bank of England shoring up the mortgage market with an injection of £50 billion, these announcements from Abbey and Nationwide show there is no limit to the amount of bad tidings homeowners can receive.
"Abbey’s announcement comes amid a growing concern that too many interest-only mortgages are being taken out as a way of reducing payments, without much thought being given to how the mortgage will eventually be repaid.
“While Nationwide’s move to cut it’s maximum lending to £500,000 shows the credit freeze is spreading further up the rungs of the housing ladder."
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.