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Mortgage payments outstrip lending as rates remain low

By Somerset Guardian  |  Posted: July 05, 2012

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Mortgage repayments outstripped lending for the first time last month as Britain's households became more cautious, banks have revealed.

Net mortgage lending declined by £78 million – the first reversal in the 16 years that records have been compiled by the British Bankers' Association.

The organisation said that households are focusing on paying down their debts, meaning their total level of debt has not been changing much.

The number of mortgage approvals for house purchase also slumped to its lowest level in 13 months, which provided further evidence that it is getting tougher for people to take out a mortgage. There were 30,238 such approvals in May worth £4.9 billion.

Lenders have been tightening their borrowing criteria amid the weak economy, as well as putting up their rates for both new borrowers and more than a million existing ones.

There are hopes that a "funding for lending" scheme announced by the Bank of England and the Treasury earlier this month could help kick-start lending.

Analysts have said this may put the brakes on recent rate increases although those currently unable to get a mortgage may see little improvement.

There were also 18,678 loans approved for re-mortgaging, worth £2.6 billion in May, the lowest number of loans since February. Lenders and estate agents have also reported a dip in activity following the end of a two-year stamp duty concession for first-time buyers in March, which bunched up sales and saw a rush of people trying to beat the deadline.

Ed Stansfield, chief property economist at Capital Economics, said: "The drop in net lending can be seen as a natural by-product of the low interest rate environment.

"When interest rates are low, a higher proportion of the monthly payments made by a borrower with a capital and interest repayment mortgage are capital.

"Nevertheless, that does not seem to explain May's abrupt drop. After all, if anything, mortgage interest rates have been drifting up in recent months.

"The implication seems to be that either lenders or borrowers, or potentially both, became more cautious in May."

Mr Stansfield said the figures "seem to add to the evidence that activity across the economy is grinding to a halt as firms and households wait for events in the eurozone to come to a head".

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