Figures from the Bank of England last week show that mortgage approvals dropped even further during October. The number of loans approved for house purchase was 32,000 compared with 33,000 in September. Approvals have fallen by 74 per cent since October 2007 while total net lending to individuals this October was £1.3bn compared with September’s £1.8bn.
It is not only a lack of consumer confidence that has been driving these downward trends – there is a significant lack of wholesale funding in the mortgage market and lenders are reluctant to take on new business. As a result, lending criteria has tightened and buyers are finding it harder to get approved for new mortgages.
Although bank rate has been cut significantly, the London Interbank Offered Rate has not yet reduced by similar levels, which means many banks are not passing on bank rate cuts to consumers in the form of lower product rates.
But Which? says banks are hiding behind Libor and using it as an excuse not to pass on rates to standard variable mortgage customers.
Which? chief executive Peter Vicary-Smith says: “Banks have been having their cake and eating it for too long. The industry claims their hands have been tied when it comes to passing on rates to SVR mortgage customers because they borrow at the Libor rate rather than the base rate.
“However, since the November 6 cut, Libor rates have fallen by significantly more than the base rate so what are they waiting for? Banks have been benefiting from this Libor cut and, to date, none of them has passed on the full cut.”
But Stroud & Swindon sales and marketing director Linda Will says she gets incredibly irritated by commentators criticising lenders for not reducing borrower rates.
Will says: “If base rate is 3 per cent and if you are having to take 5 per cent for your retail funding, funnily enough, you cannot afford to bring your mortgage rate down. And until Libor returns to having any sort of passing relationship with base rate, and until the cost of funding follows that down, we will have to maintain those differentials.”
Hamptons managing director Jonathan Cornell says he does not think “the chronic lack of funding” in the market will improve until the Government guarantees mortgage-backed securities, as recommended in the Crosby report.
He says: “We need to wait for approval from the EU on guaranteeing mortgage-backed securities. We are very dependent on that happening before the supply of lending increases. The supply of funding is extremely limited at the moment.”
Although three-month Libor rates have been falling, Cornell does not think this will be enough to revive the ailing market.
He says: “I cannot see the situation improving before the Crosby recommendations come in. Then, we will have to wait until the housing market recovers and lenders are happier to lend.
“At some stage, prices will drop to a point where people will think, well, mortgage-backed securities cannot perform that badly, so they will go back in. But we are still a good way away from that. It won’t happen in 2009.”
London & Country Mortgages head of communications David Hollingworth agrees that a declining Libor rate can have only a limited impact on providers’ lending appetite.
He says: “It does make life a bit easier but I am not going to hold my breath that we will see cheaper products as a result of it just yet. We are going to need some other stimulus to get things going and Crosby focused on ways to create that stimulus.”
Hollingworth says some fixed-rate products have been coming down in price because they are linked to swap rates which have been falling.
John Charcol senior technical manager Ray Boulger says lenders would have much more incentive to lower their rates if Libor fell to 15 or 20 basis points above bank rate.
On December 1, three-month Libor was 3.88 per cent. Boulger says he does not think these margins will narrow until the bank rate starts to go up.
He also says Chancellor Alistair Darling does not seem to understand the seriousness of the funding crisis.
He says: “It will be the middle of next year at least until the Crosby report is implemented which is ridiculous. We need something done now. If they do have to get EU approval on this, I don’t believe it would have to take months. The bank bailout only took a few days.
“Darling should have announced in the pre-Budget report that he was going to adopt the Crosby report and should have announced that facility would be available in January. That would have given encouragement in the market.”
He says although he would prefer the Government not to interfere in the mortgage market, he believes they do need to because the situation has gone too far.
“It is hard to see any improvement unless the Government does something significant to change the situation. The market cannot do it itself. So much of this is interlinked. When property prices stabilise, that will boost confidence but funding shortages are destabilising that.”