Mortgage availability 'set to improve' after further dip

The availability of mortgages fell during the third quarter of the year but lenders expect the situation to improve going forward, Bank of England research showed today.

A deterioration in the wholesale funding market led to a small net balance of firms reducing secured lending in the three months to mid-September, according to the latest Credit Conditions Survey.

The fall reversed an increase in mortgage availability seen in the previous quarter, and came despite the part-nationalised banks pledging to increase lending in return for taxpayer support.

Royal Bank of Scotland has agreed to lend £25bn to homeowners and business this year, while Lloyds Banking Group is making £28bn available in the next two years.

But lenders expect mortgage availability to improve in the final part of the year on the back of improvements in the housing market and the wider economy.

Paul Samter, economist at the Council of Mortgage Lenders, said: "There have been recent signs of an improvement in wholesale funding market conditions, and the survey records a notable pick-up in lenders' expectations that this will continue in the next three months."

There was better news on the corporate front, showing that credit availability for businesses had risen in the period, with a further improvement expected in the next three months.

Lenders are extending more loans to large and medium-sized companies due to the cheaper cost of funds, the Bank said.

The margin on lending to medium and large sized companies rose between June and September, but is expected to "narrow somewhat" in the next three months.

Despite the fall in mortgage availability in the third quarter, there were further signs of improvement in the mortgage market.

The proportion of loan applications approved rose for the first time since the second quarter of 2007, while the fees charged on mortgages and the maximum loan to value ratios lenders would advance stabilised.

Banks also reported an unexpected reduction in the number of people defaulting on their mortgages in the third quarter, probably due to a combination of low interest rates and a raft of Government initiatives to help keep people in their homes.

Default rates are expected to increase going forward, but to a much lesser extent than anticipated in recent surveys.

Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors, said: "Today's credit conditions survey confirms that the turnaround in the real estate market has been achieved despite an ongoing restrictive financial climate.

"Whilst there were some improved signs that the credit freeze to corporates may be thawing, the survey is yet to signal any significant improvements in the availability of credit to households or within the property market in general."

Vicky Redwood, UK economist at Capital Economics, said: "Overall, given the problems that banks still face, we still think that weak bank lending will be a major constraint on the economic recovery and that further house price weakness lies in wait."

But Howard Archer, chief UK and European economist at IHS Global Insight, was more upbeat.

He said: "The Bank of England survey encouragingly indicates that credit conditions may finally be starting to improve and could pick up further in the fourth quarter.

"While latest hard data still indicates muted lending to corporates and households, the Bank of England survey at least boosts hopes that quantitative easing and other policy measures undertaken by both the central bank and the Government to boost bank lending are starting to feed through to have a beneficial impact."