Bank of England Expects Mortgage Approval Rates to Improve. But at what cost?

After a challenging year The Bank of England has said that it expects an increase in the supply of mortgages in the first quarter of 2010 as the economic outlook improves. A survey of the UK’s leading banks by the Bank of England found a net 9.9% of respondents believe secured credit availability will rise in the next three months.

This could provide a timely boost for the mortgage market, but the banks still have a number of concerns. Fear of a double dip in the economy, another downturn in the property market, rising debt and growing unemployment means banks are still demanding high deposits from many borrowers. According to Moneyfacts.co.uk over the last year the number of mortgage deals available up to 60% of a property’s value increased from 184 to 291. The number of deals available at 90% of a property’s value fell from 204 to 113, reflecting the inability and unwillingness of the banks to loan on high loan to value (LTV) deals.

There are signs that banks are easing their lending criteria. A growing number of deals are now available up to 80% LTV. Abbey currently have a market leading two-year fixed rate at 3.78% up to 75% LTV.  Unfortunately it is not good news for all borrowers. “You can still expect to pay a lot more if you need to borrow 90% of your property’s value, says Michelle Slade at Moneyfacts.co.uk.” “Nationwide has a market-leading two-year fix at 5.98% up to 90% LTV with a £495 fee. That is quite a leap, so it really does help if you have a large deposit or plenty of spare equity. Therefore, whilst things are improving gradually, the banks are still reluctant to pass on the cheap cost of borrowing that they have received.

One piece of good news is that lenders are beginning to slash their arrangement fees, Richard Morea, technical analyst at London & Country Mortgages says “Lenders have routinely been charging arrangement fees of up to £2,000 in recent months, but now we are seeing more fees at around £500 to £700. That’s quite a saving.”

Conditions are slowly improving and the announcement by The Bank of England of an expected upturn in mortgage approvals signals a positive start to the year. But, there is a long road ahead and until the banks gain greater confidence in the economy, the property market, the ability of borrowers to finance debt and their own liquidity levels, they are going to continue to require large deposits from borrowers to obtain their best mortgage rates and higher LTV mortgages will remain too expensive for many buyers.