The chairman of the Financial Services Authority (FSA), Lord Turner, is calling for a crackdown on home loans that are worth nearly 100% of the property. He wants the City watchdog to force through a policy that would see homebuyers having to cough up at least 15% of the purchase price as a deposit. This would make things even more difficult for first time buyers and is a direct clash with recent government initiatives to bring back a 90% mortgage to the market through Northern Rock.
Lord Turner went further in his criticism of the government by stating that “mistaken” policies by Gordon Brown resulted in the failure of the FSA to control the banks’ lending policies and lead to the financial meltdown. He made it clear that the responsibility lay with a decade of misguided Labour policies that had prevented it from asking questions about the overall financial health of the City as banks racked up massive borrowing. He also indicated that if the FSA had tried to propose measures to force banks to lend less, it would have come up against political opposition. His verdict is certainly a damning one for Mr Brown, who as chancellor introduced the regime that allowed the crisis to spread unchecked.
Although the Premier has recently announced that the days of the 100% mortgage are over, Lord Turner says that does not go far enough and that loans of over 85% should be removed from the market. Looking at mortgages that are currently available, it is apparent that lenders have already hiked up the cost of borrowing for home buyers with small deposits. For example if you take out a three-year fixed rate with Alliance and Leicester you will find yourself paying a whopping 5.99% (don’t forget that the Bank of England base rate is currently only 1%!) and an arrangement fee of 1%. If you have a bigger deposit, a two-year fixed deal is available for 3.49%.
Of course Alliance and Leicester is not the only culprit; Lloyds TSB owned Cheltenham and Gloucester is offering customers who can put down a 40% deposit a two-year fixed-rate of 3.89%. Compare that to a 5.89% rate of interest that a customer would get when only putting down a 15% deposit. To quote David Hollingworth at mortgage broker London & Country: “Lender focus is still very much on those borrowers with chunky deposits. While many fixed rates have been steadily falling it’s a different story for those with small deposits.”
The government has pledged £14bn in lending from Northern Rock this year. This is a dramatic u-turn from the bank that has been driving away customers and slashing outstanding loans for a year, but many believe that will not be enough to kick-start the market. Louise Cuming from the price comparison site moneysupermarket.com says: “This is little more than a drop in the ocean. Mortgage lending is falling all the time and Northern Rock’s re-entry will not be enough to stop the rot.”