Northern Rock to start lending again

Having been effectively closed to mortgage business since its nationalisation last year, the Government has announced that Northern Rock will start lending again. But will this be enough to end the mortgage drought that is currently strangling the housing market?

The Chancellor, Alistair Darling, said this morning that the bank will lend up to £14billion over the next two years. This marks a volte face in Northern Rock’s strategy – since its nationalisation last February the bank has been trying to reduce the size of its mortgage book. It has not been offering loans to new borrowers, while existing customers coming to the end of their current deal have been advised to look elsewhere for a new mortgage.

But at the same time as the state-owned bank was trying to reduce its exposure to the mortgage market, the Government was calling on other banks and building societies to start lending again. With the mortgage shortage continuing, the Treasury has clearly rethought this inconsistent ‘one rule for them and another for the rest of us’ approach and decided to lead by example. But does the announcement that Northern Rock will start lending again signify a turning point in the mortgage crisis?

What’s happened in the mortgage market?

Mortgage lending has fallen off a cliff because of the credit crunch. Figures from the Council of Mortgage Lenders show that total lending fell from £364billion in 2007 to £258billion last year. Mortgages for house purchases have plummeted by 49% and in December, the number of first time buyers entering the market fell to its lowest level since records began.

Part of the problem is that lenders face a funding shortage because of the financial crisis, so there is less money available to lend. But also, on the back of an increasing number of borrowers defaulting on mortgage payments and falling house prices, banks and building societies have become much more cautious about who they will lend to. Consequently, it has become very difficult to get a mortgage unless you have a deposit of 25% or more, leaving many people stuck.

The mortgage shortage is also having a huge impact on house prices. Many analysts believe that the fact that so many people are currently unable to get a home loan is exacerbating the slowdown in the property market because potential buyers are unable to transact.

Will Northern Rock’s re-entry into the mortgage market be the stimulus that is needed?

The announcement that Northern Rock is to start lending again is welcome news, although on its own it will not bring an end to the mortgage shortage.

The Government has said that Northern Rock will lend £5billion in mortgages this year and a further £9billion on 2010, but this is still well below its pre-nationalisation lending levels. In 2007 alone, Northern Rock advance £29.5billion in residential mortgages.

However, with the bank now back in the market it adds a new element of competition so we may see other mortgage providers improve their deals as they battle for market share.

The Prime Minister has also said some of Northern Rock’s deals will be available for loans up to 90% of a property’s value. This is good news for those with small deposits or little equity in their homes, but it will also put pressure on other lenders to relax their criteria.

We won’t see a return to the pre-credit crunch days when it was possible to get a 100% mortgage, but if an increasing number of banks and building societies offer mortgages to those with 10% or 15% deposits it should help the housing market as more people will be able to transact.

That said the impact of the Government’s announcement about Northern Rock will depend largely on the competitiveness of the mortgages it offers and the early indications suggest that it could be muted.

What’s available from Northern Rock?

Northern Rock launched a new range of mortgage deals earlier this month. Its cheapest two-year fix is available for loans up to 65% of the property’s value and it has a rate of 3.99% with a £995 arrangement fee. This compares with HSBC’s two-year fix at 2.99% with a £599 fee – this deal is only available for loans up to 60%.

And while Gordon Brown has said that Northern Rock will offer loans up to 90% of a property’s value, the most people can borrow at the moment is 85% - and the rates on these deals are much higher than those on the products available for those with bigger deposits.

The bank will charge 6.29% if you want a two-year fix but only have a 15% deposit. The arrangement fee on this deal is £995. However, Yorkshire Building Society has a two-year fix at 4.99%, with a £499 fee available on loans up to 85%.

Therefore, Northern Rock will need to improve the competitiveness of its mortgage range if its re-entry into the market is to have a significant impact and help bring an end to the current impasse which is prohibiting thousands of people from getting home loan.

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