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Mortgage competition set to increase, says Bank

The Bank of England has reported that spreads on mortgage lending may contract in the second half of the year as competition in the market begins to increase.

The Bank’s August lending trends survey has found that the extra cost of borrowing at 90 per cent plus LTV relative to 75 per cent LTV remains high, but it says several lenders have told the Bank that they expect increased competition and a compression of spreads in the second half of 2009.

The Bank found, in July 2009, lending for house purchases rose to £5.2bn, up from £4.8bn in June, and the largest amount since May 2008. It also found that lending for remortgages remained at £3.3bn for the third month in a row, down from £10bn in July 2008.

It also found that some of the major UK lenders reported an improvement in their ability to convert mortgage applications – the Bank’s lending panel reported a rise in approvals to 53,400 for July, up from 50,200 in June – the highest figure from major lending since the end of 2007.

LSL Property Services commercial director David Brown says: “Most of lenders’ available mortgage funds are being directed to home purchase as opposed to remortgaging, which is vitally important for the health of the housing market.

“Lenders must continue to favour homebuyers rather than existing homeowners and the extension of the quantitative easing programme by the Bank of England should give them the tools to do so. Banks and building societies can and must do more.”

The Bank also found that lending to small and medium-sized businesses remains extremely low, in part blamed on businesses preferring to pay back debt rather than borrow – the Bank says funding difficulties appear most prevalent amongst smaller companies.

Net lending to business in the UK fell to -£18.8bn in Q2 2009, down from -£100m in Q1, and the three-month annualised growth rate for lending to UK business fell to a low of -6.9 per cent in June 2009.

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