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Banks hold back loans as lending hits nine-year low
Hugo Duncan and Sri Carmichael25.08.09
Banks are still starving households and businesses of lending despite government efforts.
The amount of extra money they are pumping into the economy for home loans has slumped to the lowest level in nearly nine years, the British Bankers' Association said today.
Hundreds of billions of taxpayers' money has been used to support the banking system but net mortgage lending was only £1.6 billion last month — the worst figure since October 2000.
Lending to businesses plummeted by £4.1 billion last month, a far greater decline than the £300 million drop seen in June, as firms repaid loans quicker than banks extended them.
Ministers have put pressure on banks to lend more to families and companies to encourage them to spend more and drive the economy out of recession.
Banks insist they are taking on trustworthy borrowers but are restricted by rules forcing them to hold a bigger “safety net” of cash to cover any future losses amid global financial turmoil.
The number of mortgages approved for new purchases rose last month to 38,181 from 35,564 in June, but this was offset by borrowers paying back far more than the previous month.
Seema Shah, property economist at Capital Economics, said the resulting low net lending figure was hampering any recovery in the housing market.
She said: “July's modest rise in mortgage approvals provides further evidence that, while housing market activity is recovering, it is doing so at only a very gradual pace.
“With little tangible evidence that the tightening in lending criteria is being reversed, we do not expect the recovery to gather much momentum over the coming months.
“The weak economic outlook means that there is little incentive for lenders to relax lending criteria.”
The data on the mortgage drought comes as it emerged that banks are making more money than ever on home loans.
The difference between what banks are charging customers for a two-year mortgage (5.18 per cent) and the two-year swap rate, which is the amount it costs them to lend the money (2.04 per cent), stands at a staggering 3.14 per cent. This is the widest margin on record, according to research by Moneyfacts.co.uk
Most mortgage rates have barely fallen in the past year, despite record cuts in interest rates. The banks that received government bailouts are among the worst offenders. State-owned Northern Rock has reduced its rate for new borrowers by only 0.27 per cent, leaving it at 6.42 per cent, according to Moneysupermarket.com research.
The average mortgage rate offered by part-nationalised Lloyds TSB has dropped by only 0.73 per cent to 5.42 per cent, while the Royal Bank of Scotland's rate is down 1.09 per cent to 5.48 per cent.
Michelle Slade, of Moneyfacts.co.uk, said: “Borrowers looking for a new mortgage deal are continuing to pay a heavy price for previous mistakes made by lenders.
“Normal rules where lenders pass on decreased rates based on the cost of funding seem to have well and truly gone out of the window.”
Nicholas Leeming, director of propertyfinder.com, said: “Buyers are champing at the bit to take advantage of attractive house prices, but the banks, awash with vast sums from the Government and Bank of England, are suppressing new lending and encouraging borrowers to repay existing loans.”
Reader views (5)
The worst of the recession may indeed be over but it seems clear that the current situation, with the mortgage market still crying out for more competition and product choice, is likely to be the status quo for some time as we continue to bump along the tail of the recession for an extended period. Roll on 2010!
- Michael White Ceo Email Mortgages, London, England
Banks make no money unless they loan out money (interest), this is temporary, trust me.
- Dirk Diggler, Soho, London
“Borrowers looking for a new mortgage deal are continuing to pay a heavy price for previous mistakes made by lenders.
You're telling me! My new mortgage offer is higher than the previous one because I want a fixed rate. Can you believe that? And that is after I have proved for 16 years that I am a good risk as I have NEVER defaulted on a payment. Go figure!
- Maya - London, London
don't be silly of course there is no money for loans - the money is needed to pay bonuses and high salaries to bankers!! Perhaps it is time for the government to call in its loan to the banks and use the money to pay directly to small businesses and to people suffering problems with paying their mortgages.
- Andy, london
The Banks, building up their reserves and straightening their balance sheets via Government instructions, are acting shrewdly and with circumspection - thus punters with poor credit and bad debt records will be left out in the cold for at least two more years.
- Ted, London
