Financial changes

ID 100146576

It may seem strange that getting a mortgage is very difficult while at the same time banks are lending more money again. Strange – but true. And it has all come about because of the Bank of England’s £80 billion initiative, launched last August, to try to boost the struggling economy.

The Bank of England and Treasury’s Funding for Lending Scheme (FLS) was designed to make money available to banks on the condition they passed it on to businesses and households in the form of cheaper loans. It was hoped that the initiative would provide the incentive needed to free up funding for banks and support the economy by easing the flow of credit to households and businesses.

The banks were offered vital funding at low interest rates over a four-year-period, the fees on the loans being set up in such a way as to provide an incentive for banks to increase their own lending to borrowers. That was the theory of it. But some credit-worthy businesses and households have been reluctant to increase their debts in the present economic climate. At the same time the banks are not too keen on lending to companies and individuals who are in financial difficulties. The money is there – but such are the perceived risks for the banks that the new credit rarely goes to those who most need it.

The same cannot be said about people trying to get a mortgage. Within three weeks of shares in Northern Rock falling sharply in August 2007 Britain’s banks were engulfed in a global financial crisis – and the mortgage market has not yet recovered. Borrowers are continuing to suffer as a result.

Getting a mortgage is harder than ever. People can no longer have even a minor blip on their credit file when making a mortgage application. It has to be unblemished. Otherwise the application will be rejected. The self-employed are suffering more than most. Anyone in this situation needs at least two years of good accounts if there is to be any possibility of them getting a mortgage.

It is a far cry from five years ago when banks and building societies were almost begging people to take out a mortgage with them. Many borrowers have found themselves trapped. They cannot remortgage because they do not have enough equity in their home, or have an interest-only mortgage, or their circumstances have changed and they no longer meet the criteria set by the lender.

With Britain in recession, household finances under pressure, and lenders being particularly choosy about the people to whom they are prepared to offer mortgage facilities, it is a very difficult time for the property market.

The value of mortgage lending has fallen dramatically since it hit a record high in 2007 and the number of house purchases has slumped proportionately. There has also been a sharp dip in house prices, although there have been signs recently of an upturn. Nevertheless it remains hugely expensive for people to buy houses – even if they can manage to get a mortgage.