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Mortgages - Mortgages are halved as market struggles

Experts predict that the amount of mortgage collateral available from British banks will fall by a half this year. Warnings have come from

The Council of Mortgage Lenders (CML) that mortgage funds could fall to half last year’s £108 billion fund as building societies and banks struggle to process the bad debts inherited from the subprime markets. The number of mortgage products available to customers has also been slashed by two-thirds since the credit crisis began. The majority of the products taken off the market were 100% home loans, but almost all of the best deals which were available last year have now gone.

The CML’s Chairman Steven Crawshaw made a statement in an article on Icwales.co.uk: “Potential borrowing still significantly exceeds the industry’s collective capacity to supply funds. It is a real possibility that net lending in 2008 could reach only half last year’s level unless additional funds become available.” If additional funds do become available they will come as part of a package proposed by the Government in an effort to limit the damage caused by banks that are presently unwilling to lend to each other.

The government is rushing in to save the day and the Chancellor of the Exchequer, Alastair Darling is having meetings with experts in Washington to find a solution to the problem but financial gurus are saying that the money which the Bank of England hopes to provide UK banks and building societies with, may be too little too late. In the mean time, customers are dealing with their own personal credit crisis by going ‘interest-only’ when they do take out a mortgage.

Talking to The Telegraph this month, Adrian Coles, director general of the Building Societies Association (BSA), said: "It's a sign of the pressure on buyers to afford high house prices and their desire to minimise monthly costs."

The Telegraph also revealed that: “On the average mortgage of £150,000, the cost difference between a repayment and an interest-only mortgage would by around £250 a month.” But, “BSA figures show that 33% of all new mortgages are now advanced on an interest-only basis, compared to only 13% five years ago.”

Coles points out that the ‘interest-only borrower’ will have to repay the capital eventually and that this may prove hard. He stressed that it is up to individual borrowers to assure that they can afford to make repayments on the mortgages that they have taken out. Although many customers are thinking that 25 years is far enough ahead to not worry too much, lenders are worried and they are beginning to change the way in which they assess mortgage applicants.

Cheltenham and Gloucester, Halifax and Nationwide are all beginning to take more into account when assessing new applicants. It is no longer simple multiples of a mortgage applicant’s income which determine whether or not the bank will allow them a home loan.

This means that what little mortgage funds and what few mortgage products remain at the end of the year will go to people who the banks can really trust to repay the capital on their mortgage, not just the interest.