Spending cuts blow to home loan numbers

Lending levels slumped to a five-month low in October as the government's austerity measures drained confidence from the housing market.

The number of loans given to home buyers fell 16 per cent from a year ago, the Council of Mortgage Lenders (CML) revealed yesterday, with lending to first-time buyers and homeowners down by about a fifth over the same period.

Michael Coogan, director-general of the CML, said the year-on-year comparison suffered because of a surge in demand in late 2009 before the stamp duty concession ended. But loans for house purchase and remortgaging in October were also down from the previous month.

"Consumer confidence has also been affected by October's spending review, despite the relative affordability of monthly mortgage payments, so a stable but small lending market will continue for some time to come," said Mr Coogan.

The number of loans given for house purchase, 46,000, was the lowest since May this year and the weakest October level since the CML began recording monthly figures in 2002. Activity in the market has dropped steadily in recent months and a combination of slowing demand and oversupply has driven prices down across the UK.

Lending to first-time buyers plunged by 19 per cent over the last year, said the CML, with the 17,000 loans given in October also down 5 per cent from the previous month.

First-timers have been frozen out of the market by strict lending criteria and a shortage of loans to those with small deposits. First-time buyers put down an average deposit of 20 per cent in October, down from 24 per cent in September and the lowest since November 2008, partly because lower house prices mean lower loan amounts are required for buyers.

However it was also down to a tightening of lending criteria in other ways, as lenders stopped offering interest-only mortgages before an expected regulatory clampdown on the products. There was a five-year peak in October in the number of buyers taking repayment mortgages, which accounted for the highest proportion of loans to first- timers since records began in 2007.

Around 30 per cent of first-time buyers took out interest-only deals prior to the credit crunch, but the Financial Services Authority is considering banning first-timers from taking out interest-only mortgages unless they have a specific vehicle for repaying them.

The figures were published as a leading economist predicted that the sluggish lending trend would continue throughout 2011, sustaining the downward pressure on house prices.

Paul Diggle, property economist at Capital Economics, said: "Given that economic growth is likely to be sluggish and a fresh rise in unemployment is on the cards, we do not expect activity levels to improve significantly next year. That, combined with the fact that house prices are still overvalued, will lead to further falls in 2011."