Mortgage squeeze 'to get worse'

House prices have stalled in recent months, surveys say

The squeeze on the availability of mortgages is expected to continue in the next three months, the Bank of England has warned.

But it also predicted that demand for home loans was likely to fall slightly during the same period.

The Bank, in its Credit Conditions Survey, said lenders expected the rate of homeowners defaulting to rise.

Lenders have been raising the cost and tightened the availability of mortgages recently because of the credit crunch.

Survey's finding

The survey confirmed that lenders had reduced the availability of mortgages in the three months to mid-March and "expected a slightly larger reduction" over the next three months.

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But lenders are also expected to cut the amount of ordinary loans, not secured against property, such as credit cards and overdrafts, in the next three months.

Small businesses were also expected to feel the squeeze, with a slightly smaller fall in corporate credit on offer.

Vicky Redwood, of Capital Economics, said the findings increased the chances of the Bank's Monetary Policy Committee cutting interest rates at its next meeting.

"The outlook for economic growth has deteriorated enough to prompt a rate cut next week," she said.

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "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% by the summer."

Facts and figures

The survey asked lenders about their predictions for mortgage availability over the next quarter of a year. A balance of plus 43% thought that availability would tighten.

A balance of plus 31% said they had cut lending rather than increased it in the first three months of 2008.

Many put this down to the changing economic outlook and the changing appetite for risk.

Meanwhile demand for home loans was broadly unchanged over the past three months, the survey said.

Some 16% more lenders expected this to start falling in the next quarter.

All change

The credit crunch has meant that mortgage providers have been far less likely to lend to each other, leading to a cut in the number of mortgages available.

On Wednesday, First Direct, the Co-operative and Lehman Brothers' Southern Pacific and Preferred Mortgages all announced they were suspending some mortgage offers.

They claimed they were being swamped with demand after maintaining competitive rates. Most lenders have lifted rates, despite the Bank of England's cuts in the base rate.

According to financial information service Moneyfacts, the number of mortgage products on offer has fallen by 20% over the past week.

This means that people having to remortgage, expected to be more than one million this year, will need to shop around more for a deal.

The situation is even bleaker for first-time buyers even though, paradoxically, the cost of homes has started to drop in the past couple of months.

They face having to find a much bigger deposit than would have been the case before the squeeze began.

Simon Tyler, of mortgage brokers Chase De Vere, said: "The first thing to disappear was over-100% mortgages, then 100% mortgages, then 95% mortgages, and shortly you are going to have to have a fairly substantial deposit, maybe 15% as a first-time buyer."

With the Land Registry putting the average cost of a home in England and Wales at �185,616, buyers could need a deposit of �27,842 for a typical home.

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