Borrowers left in cold by bailout

Published 01st Mar 2009

Little comfort for pressed borrowers as rate hopes rise


Huge swathes of borrowers at government-backed banks have plunged into negative equity and will not be helped by the banks’ commitment to lend more in return for a £600 billion bailout.

Nationalised Northern Rock is expected to reveal that more than 170,000 of its borrowers are in negative equity when it publishes its 2008 annual results this week.

Lloyds Banking Group conceded last week that 15% of its mortgage book before its takeover of HBOS — £17 billion of a total £113 billion — related to customers who owed more than their property’s value.

Nationwide last week said house prices fell 1.8% in February, taking the total decline since November 2007 to 21.8%.

Tumbling house prices, coupled with soaring unemployment, would cause Lloyds’ arrears and repossessions to surge this year, it said in its financial results.

Borrowers with little or no equity in their home will not be helped by moves to force lenders to pump billions into the mortgage markets. They will be stuck on lenders’ standard variable rates — which banks can change at will — as they are unlikely to be eligible for any new deals.

Since the onset of the credit crunch, lenders have restricted top deals to those with at least 25% equity in their home. There are no deals available for those with a deposit of less than 5%.

Northern Rock returned to the lending market last week, pledging £14 billion of home loans to new and existing customers in the next two years. It will write some large loans — but only up to 90% of a property’s value. Northern Rock’s chief executive, Gary Hoffman, said last week the “door is closed” to other borrowers. That includes people who took out its “Together” loans of up to 125% of a property’s value. In mid-2008, about 172,000 customers had these mortgages. That figure is understood to have barely changed in the past six months.

Royal Bank of Scotland (RBS) will also lend more in return for further financial help from the government that could see up to 95% of the bank owned by the taxpayer. The government has a 68% stake now.

RBS pledged to lend at least £9 billion to residential customers this year, and a total of £50 billion to homeowners and small businesses in the next two years.

It has not yet said whether borrowers with small deposits will benefit, but Chancellor Alistair Darling made it clear the government did not wish to back “risky” loans.

But while the picture remains bleak for borrowers with little or negative equity, signs of life are returning to the market for homeowners with sizeable deposits. HSBC last week brought out a market-leading five-year fix at 3.99%. The loan, which has a £999 fee, is open to those with a 40% deposit who want to borrow up to £250,000.

Aaron Strutt of Chase de Vere Mortgage Management, a broker, said: “We’ve really seen competition for business hot up, and the better rates we’re seeing puts pressure on other banks to lower theirs.”

With Bank rate expected to fall further, Ray Boulger at mortgage broker Charcol said those on cheap trackers were better off staying put. “Interest rates are unlikely to go up this year — and could well go down 0.5 percentage points next week,” he said.

Source: ' Sunday Times '

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