Mortgage lenders accused of panicking

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First-time buyers forced to put cash up front

Two of Britain's biggest mortgage lenders were accused of introducing panic measures that could push the property market into recession after they cut their lending limits in "hot spots" to protect against falling house prices.

NatWest joined Alliance & Leicester in confirming yesterday that it had reduced the amount it was prepared to lend in the booming markets of London and the South-east.

Both banks , which between them account for 7 per cent of Britain's £793bn mortgage market, are only prepared to lend 90 per cent of a property price in areas where they believe home owners could be exposed to negative equity – and repossession – if prices collapse.

Rocketing house prices in areas such as Greater London, where values rose by 17 per cent last year, have led to fears that a global downturn could leave millions of home owners badly overstretched.

But mortgage brokers and other lenders criticised the move to restrict loan amounts, saying it could provoke price falls in certain areas at a time when the housing market was set for modest growth.

There was also concern that the move would penalise first-time buyers. About a third of home buyers have mortgages that account for 90 per cent or more of their property's value, and the largest section of these are first-time buyers.

Ray Boulger, senior technical manager of the mortgage adviser Charcol, said: "This will introduce a degree of uncertainty into the market that could affect property values and lead to falling prices.

"It is naïve to think you can put a cap on the amount of a loan for a whole area. It is also shutting the stable door after the horse has bolted – there were price falls at the top of the market in September but they have now levelled out."

Alliance & Leicester announced in October that it was reducing its maximum loan for properties costing between £100,000 and £250,000 from 95 per cent to 90 per cent in Greater London and South-east England. The area includes Southampton, Milton Keynes, Portsmouth, Colchester, Chelmsford, St Albans and Tunbridge Wells.

NatWest, part of the Royal Bank of Scotland Group, said it had introduced the 90 per cent loan limit in areas where it judged there had been "disproportionate" price rises.

But unlike Alliance & Leicester, NatWest refused to pinpoint the exact areas in the South-east where the loan policy applied, saying it was reviewed weekly.

Rival lenders – including the two biggest lenders, Halifax and Nationwide along with HSBC, Cheltenham & Gloucester, Barclays and Woolwich – said they had no plans to introduce similar arrangements.

Halifax said it was writing to the Council of Mortgage Lenders, an umbrella group for the industry, to ask for the issue to be raised among other banks and building societies. A spokesman said: "There are already very straightforward means of protecting against price fluctuations by ensuring the property is affordable for the customer.

"There is widespread agreement that property prices will continue to increase this year albeit less strongly – we think by about 5 per cent. Widespread price falls are not what has been predicted."

Alliance & Leicester, which imposed its loan cap because of fears about the economic consequences of the 11 September attacks, said last night that the policy was under review and could be abandoned.

But Benny Higgins, chief executive of retail banking at the Royal Bank of Scotland Group, defended NatWest's position, saying it affected fewer than 1 per cent of its customers. He said: "We are seeking to protect our customers. In areas where there have been disproportionate price rises, we believe it is prudent to reduce the loan amount.

"It affects only a small number of areas which are reviewed constantly and can change on a weekly basis. It would not be right to give a list of locations that could be out of date very rapidly."

Housing market experts insisted the geographical boundaries were too blunt an instrument. Jeremy Leaf, house marketing spokesman for the Royal Institute of Chartered Surveyors, said: "It is an arbitrary system – conditions can vary within a postcode let alone a whole region."