End of lending targets could return tighter mortgage conditions

Ian Gray, mortgage manager at Largemortgageloans.com suggested that part state-owned banks including Lloyds Banking Group and Royal Bank of Scotland are likely to lend less after the government's lending targets end in just over 3 weeks.

He said: “Lloyds currently offers 154 higher loan-to-value (LTV) deals, which constitutes the bulk of the market. If the bank goes ahead and creates its own lending levels, then it will be tightening up on 90% LTVs, and will be restricting its lending to home buyers with smaller deposits.”

Ray Boulger, senior technical manager at John Charcol, added that lending levels are likely to be restricted from the part state-owned banks, which he fears are in a weaker position than other lenders.

He said: "I can't see Lloyds and RBS lending to the levels seen last year. Banks such as HSBC, Barclays and Santander - all of whom increased their market share in 2010 - are more likely to maintain steady levels of lending as the year progresses and provide more to potential home buyers."

Lloyds refused to comment on its lending plans from March 2011 onwards. But in a statement to Mortgage Solutions, Lloyds said that it will continue to actively support the UK’s economic recovery by lending to business and its mortgage customers.

The Group said: “In the second year of our lending commitments to the government, we agreed to gross new lending of £67bn in the 12 months to March 2011, of which £44bn would be extended to UK businesses and £23bn to homeowners.”

Meanwhile, the Royal Bank of Scotland’s lending target for the 12 months to February 2011 is £8bn, which it said it is on course to meet.

“We will continue to offer a wide range of competitive mortgages throughout 2011,” said an RBS spokesperson.

Northern Rock has reported that its gross lending for the first half 2010 stood at £1.975bn and in line with target. It expects to record the same level of lending for the second half of the year, until February 2011.

A spokesperson for Northern Rock said: "We are keen to support the mortgage market and make sure that lending is responsible and in taxpayers' best interests. There are some restrictions in the market, but we will continue to play our part and help home owners."

Gray suggests that other big lenders in the market offering 90% LTV deals - including HSBC, Nationwide and Yorkshire Building Society - will be unaffected by the withdrawal of the government’s lending targets and continue to operate good deals to potential home owners. 

“I don’t think there will be a void left in the market if Lloyds and RBS stop offering higher LTV deals. Instead, I think there is an incentive here for the other lenders to compete with one another,” he said.

“For example, HSBC has consistently offered good rates at 90% and will continue to do so. However, with lending criteria tightening up, most people will know that it is still difficult to get a mortgage from them.”

Gray insists that competition between the major lenders is vital to help restore the market, and encourage the banks to start lending more from March 2011.

“The preferred business model for lenders is to operate on an exclusive basis, meaning that the banks will not want to reduce their rates which they’re currently being forced to do.”

For the remainder of the year, Gray has forecasted a downturn in lending levels, causing a drop in market activity.

“First-time buyers will be hit with a double whammy if the market continues to fall in 2010. It is also unlikely that the government will put forth new legislation this year to help encourage lending, if the banks fail to do so.”