Mortgage lending down 95%

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Mortgage lending down 95%

Mortgage lending has collapsed to its lowest ever level since the Bank of England’s records began in 1993.

Although these figures have not come as a shock, they have led to calls for a cut in the bank of England base rate. Lending in August according to the bank, fell by 95% on the previous month.

The drop has been fueled by a number of factors including;

  • Falling house prices.
  • Buyers waiting for prices to drop.
  • A lack of liquidity in the banking system.
  • A lack of mortgage products in the banking system.
  • Rising borrowing rates from lenders.
  • A possible stamp duty holiday.

In total, according to the Council for Mortgage lenders house prices as of last month have fallen at an average rate of 12.5% since the same time last year. Lenders, including BM Solutions (owned by HBOS) have already raised their interest rates and there other lenders including the Nationwide have indicated that they will also be raising their rates. The mortgage works and UCB have withdrawn many of their deals from the market.

There was further misery for homeowners yesterday when a series of lenders indicated they would be raising interest rates due to the turmoil in the money markets.

Economists are calling for the Bank of England’s monetary committee to cut interest rates to help lower the cost of borrowing and reduce the pressure on home owners, particularly those on variable rate mortgages.

What we are facing is a cyclical effect. People are aware of the deepening world wide financial crisis and they are becoming increasingly cautious.

The simple fact is that why should buyers purchase an asset now when mortgage products are few, interest rates are high and when that asset could be worth 25% less in a year or two. In this uncertain economic time it makes more sense to be prudent and hang on to their cash.

With bank increasing their borrowing rates, what has followed is an increase in the libor which the inter bank lending rate; the average of which has increased from 5.71% to 6.26% and which has also in the past week hit a day high of 7%.

The LIBOR and borrowing figures are the latest evidence of the impending recession. The nationalisation of Northern Rock, Bradford and Bingley, the collapse of Lehman Brothers (the forth largest banking institution in the world), and the announcement that AIG is going into recievership have only led to increase the lack of trust between banks at the moment. If they can not trust each other, they will not lend to each other for fear of not getting their money back. If they can not lend to each other they will not have enough liquidity to lend to their customers and make money.

The sheer scale or the problem can be highlighted by this fact. For every one job lost in the city, eight are lost elsewhere. The UK is heavily reliant on a strong financial sector, indeed we thrive on it. The very thought of a melt down is very worrying, very worrying indeed.