Cautious mortgage lending and impact on home purchases

Despite the slow pace of economy recovery, the property market is showing the first signs of improvement as mortgage lending begins to increase in April.

According to the report of the BBC, the Bank of England indicates that the number of mortgages approved for property transactions in April has increased to 49,871, as compared with 49,008 during March. This amounts to a rise of two per cent.

The Council of Mortgage Lenders might revise further its forecast for the amount of mortgage lending in 2010. The gross lending is expected to reach £150 billion this year, while net lending is projected at £15 billion.

According to the Mortgage Advice Bureau, the market sentiments are still sensitive and vulnerable to changes. Since the beginning of June, new mortgage borrowers with Lloyds TSB and Cheltenham and Gloucester would have to pay a higher standard variable rate at 3.99 per cent, when their initial deal expires.

A report published by This Is Money indicates that lenders are tightening loans to property buyers who opt for interest-only covers over the standard repayment mortgages.

Lloyds TSB, the biggest lender, has stopped lending interest-only mortgages for amounts of more than £500,000, further to the similar measure taken by Yorkshire Bank.

Moreover, Northern Rock has started to restrict interest-only lending. It now insists on a 25 per cent deposit from borrowers. Those who borrow can only take out an interest-only loan if they pledge to switch to repayment later.

Interest-only loans have been popular because of the additional flexibility with repayment, and the initially lesser cost of repayment.

The mortgage tightening measure reflects lenders' concerns towards the repayment ability of borrowers. The banks, according to mortgage broker London & Country Mortgages in Bath, Somerset, may also be worried about the financial credibility of high earning individuals who request for interest-only borrowing, repaying only when they receive bonuses or dividend incomes from their investments. In the current economic climate, banks prefer to maintain a more cautious stance.

At the same time, taking a cautious view of the market, homebuyers and buy-to-let landlords are also turning to landlord insurance to protect their assets against damages, public liabilities, and potential legal disputes with tenants.