Bank of England: Lending criteria set to tighten further

Securing a mortgage is set to become even harder in the next three months in the UK market, as the credit squeeze in the money markets pressures UK homeowners.

The Bank of England (BoE) Credit Conditions Survey predicts a larger reduction in mortgages available in the next quarter than already experienced.

Unsecured credit – from personal loans to credit cards and overdrafts – is also expected to get somewhat harder to obtain in the next three months.

As mortgages are squeezed off the market, demand from homeowners and buyers for mortgages has remained unchanged – although a stagnant property market is expected to cut demand for home loans. Demand for buy-to-let mortgages rose.

The coming three months are also expected to see a rise in repossessions – as the slowing economy, rising prices and mortgage repayment increases put homeowners under increasing pressure.

The Bank's report puts the fall in mortgage lending down to lenders' reduced risk appetite – meaning those deemed to be higher risks are having mortgage options closed – along with concerns over the economy and the housing market.

Remortgage demand rose more highly than expected and is due to increase as borrowers coming to the end of the fixed or discounted interest period on their mortgages look to refinance with an alternative deal.

Commenting on the figures, Howard Archer at Global Insight said tighter borrowing did not bode well for the UK economy.

"Credit conditions heaps pressure on the Bank of England to cut interest rates again next Thursday despite current elevated inflation concerns," he said.

"It still looks a close call, but we expect the Bank of England to trim interest rates from 5.25 per cent to five per cent. Further out, we see interest rates falling to a low of four per cent in the first half of 2009."

In response to the findings the Royal Institution of Chartered Surveyors (Rics) argues the time is not right for the Bank to act on interest rates.

"The findings of this report come as no surprise given that lenders have been tightening their criteria over the past few months," said Simon Rubinsohn, Rics chief economist.

"Many will find the availability of finance limited and the cost of borrowing challenging as purse strings tighten in response to economic conditions.

"This supports the case for the Bank of England taking further action. It is conceivable that they may cut interest rates again next week. If not, it is almost a certainty that rates will cut to 4.5 per cent by the summer."