CML news & views

As the effects of the credit crunch have begun to feed through more clearly in our mortgage completions data this year, several trends have emerged. Monthly lending volumes are lower than last year’s, loan-to-value ratios are easing, and the spread between the average mortgage interest rate and the Bank base rate is widening.
 
Our latest regulated mortgage survey data clearly shows a tightening in lending criteria as a result of ongoing funding constraints and a softer outlook for house prices. The average first-time buyer put down a hefty average deposit of 13% in April – the highest level in over three years.

The April data also revealed that affordability indicators have eased for house purchase loans. First-time buyers typically took out loans for 3.3 times their income, down from 3.35 times income in March and the lowest level since November 2006. The average home mover loan was 2.96 times income, down from three times income in March and the lowest level since July 2006. The proportion of income typically spent on mortgage interest payments by first-time buyers also fell to 19.6%, from a high of 20.7% last December.

However, this does not necessarily indicate that affordability improved in April for new mortgages. Rather, it demonstrates how the profile of borrowers has changed as a result of the credit crunch.

The demand for mortgages currently exceeds the supply of funding, and fewer borrowers are able to obtain mortgages. Lending for house purchase in the first quarter of 2008 was down 41% on the same period in 2007. In response to the squeeze on mortgage funding, lenders have adopted a more conservative approach to risk. By tightening lending criteria, lenders are selecting less risky borrowers, who have larger deposits and want to borrow less relative to their income.

So while our data is showing lower income multiples and levels of income spent on interest payments, this is not an indication of improving affordability; rather, it is a question of who is receiving the mortgages. Servicing a mortgage has not become more affordable for new borrowers since the credit crunch. What our data is showing is that those who are less stretched financially are more likely to get a mortgage.

There was a monthly increase in lending volumes in April, although activity remained weaker than a year ago. Gross lending increased by 8% in April to £26.1 billion, from £24.1 billion in March, after two consecutive months of decline. That was 5% down from April 2007, but the year-on-year rate of decline was lower than in recent months – gross lending in March 2008 was 24% lower than March 2007. 

Fixed-rate loans became more popular in April suggesting that borrowers are looking for certainty over future mortgage payments in uncertain times. There is also now a greater likelihood that the Bank of England’s next decision will be to raise rates. The proportion of borrowers taking out fixed-rate products increased to 59% in April, from 54% in March. This is the largest proportion since December last year.

Remortgaging accounted for 42% of gross lending in April and has continued to perform much better than lending for house purchase, driven partly by large numbers of borrowers exiting fixed-rate mortgages. There were 83,000 loans for remortgage, worth £11 billion, in April up 14% by volume and 11% by value from March.