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Eurozone crisis to constrain mortgage lending for a year

The crisis in the eurozone is already affecting UK mortgage lenders’ funding costs and is likely to restrain mortgage lending for the next year, according to Capital Economics.

In a UK housing market update published today, Capital Economics says that while mortgage lending has strengthened in recent months, European financial woes mean a full recovery in lending should not be expected any time soon.

It says that according to its measure of the cost to mortgage lenders of raising funds in the wholesale market, which combines three-month Libor with five-year swap rates, the cost of wholesale funds has risen by approximately 2 per cent since June.

Paul Diggle, property economist at Capital Economics, says: “That rise reflects the market’s concern about the exposure of UK lenders to the escalating sovereign debt crisis in the eurozone.”

He says this spike in the cost of funding is unlikely to be rapidly reversed with a solution to the eurozone’s woes still far off.

Diggle says this will have a negative impact on lenders’ willingness and ability to lend, and that the supply of mortgage finance is likely to remain restricted for the next year or so, as well as potentially becoming more expensive.

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