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Banks must share the blame for low demand

by: Melanie Bien
  • 31/05/2011
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Banks must share the blame for low demand
Private Finance's Melanie Bien tackles banks for blaming lack of lending on low demand, saying lenders' lack of appetite is driving borrowers away.

One of the major complaints made about the main high street banks is that they are still not demonstrating any real appetite to lend.

They may offer a range of products, some extremely competitively priced and with high loan-to-values, yet accessing those deals appears harder than ever.

This week, the banks were under attack yet again, this time for falling more than £2bn short of lending targets to small and medium-sized businesses set by the Treasury as part of the Project Merlin scheme.

While the overall lending figures are said to be on target, suggesting that there is no issue with lending to individuals, the reality is rather different.

The British Bankers’ Association (BBA) revealed this week that the number of mortgages for new purchases agreed in April fell by 6% on the previous month, to 29,355. This was 18% lower than a year earlier.

The BBA blames weak demand for home loans for the lack of lending. It says that individuals are saving more, paying off debt and borrowing less, due to uncertainty about the economy.

Well, hang on just a minute.

I daresay there is some reluctance from nervy would-be buyers, but much of this is down to the difficulty in getting mortgage finance as lenders continue to be extremely unwilling to lend.

Isn’t it more the case that the lack of funding in the first place, with lenders having shut up shop, has dissuaded would-be borrowers from even attempting to get finance?

With the perception that getting finance is tricky if you don’t have a squeaky-clean credit history and a sizeable deposit, why wouldn’t borrowers be put off? Isn’t it the case that if you knock on a door a couple of times and get no answer, that you give up?

Lenders shouldn’t be surprised if their attitude means that borrowers are less interested in borrowing.

Of course, this will present lenders with difficulties. Although their actions suggest otherwise, they do need borrowers to make money.

It may go some way to explaining the number of lenders cutting their fixed rate mortgages in the past few days; yes, Swap rates have fallen but lenders’ margins were always on the hefty side.

Borrowers worried about interest rates rising simply haven’t been prepared for the big jump between cheap variable rates and pricier fixes. So they’ve been staying put, much to the chagrin of the banks.

I daresay the big banks will respond with ever-more competitive pricing, designed to entice borrowers back. But it doesn’t look as though cherry picking from lenders will go away anytime soon.

Nor will demand significantly increase until the banks demonstrate that they really do have an appetite to lend and aren’t merely paying lip service.

Melanie Bien is director of Private Finance

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