Gloom deepens as lending slumps and borrowers fall into arrears

The number of home loans, seen as a key barometer of future conditions in the housing market, fell to a record low of just 58,000 in April, down from 64,000 in March and 113,000 in April last year. This is the lowest figure since records began in 1993.

The dire state of the mortgage market was highlighted further by Bradford & Bingley, Britain’s biggest buy-to-let lender, which reported a sharp rise in the number of borrowers in arrears.

The bank, which issued a profit warning after raising emergency funding by selling part of its business, said that the number of borrowers who had missed three or more monthly payments jumped by 36 per cent between the end of December and the end of April.

Nationwide will increase its fixed rates today for all borrowers by up to 0.3 per cent. Some experts say that Bradford & Bingley may seek to boost its coffers by increasing its rates still further.

Jonathan Cornell, of the mortgage broker Hamptons Mortgages, said: “If Bradford & Bingley raises its rates, other lenders will have to raise their rates too, otherwise they will be besieged by applications, something which lenders are keen to avoid while funding is short.”

Specialist lenders have struggled as their method of raising funding — packaging up bundles of mortgage loans and selling them on to other investors — stalled after the US sub-prime crisis. Banks became wary of lending to each other and, as a result, they were unable to fund new deals.

Mr Cornell said that several specialist lenders, who offered buy-to-let deals, including Edeus, Advantage and DB Mortgages, had already withdrawn from the market, and Paragon, the third-biggest lender, was sitting on the sidelines.

Landlords are already facing a sharp rise in repayments. A borrower with a £200,000 loan, switching from a deal fixed at 5.45 per cent to one at 6.45 per cent, will have to find nearly £200 more a month to cover the repayments.

There are about one million buy-to-let borrowers in Britain but the sector has been hit by falling prices in recent months. Prices of city centre flats, popular among investors, have slipped faster than other types of property since house prices began to fall.

The proportion of buy-to-let mortgages repossessed in the first three months of the year more than doubled from 0.7 per cent in the first three months of last year.

John Postlethwaite, of Punter Southall Financial Management, an independent financial adviser, said: “Private landlords in this situation are faced with a stark choice.

“To remortgage they will have to increase the rent . . . which may not be practical. Alternatively, subsidise the new payments with the existing lender . . . which may not be affordable. Or sell the property.”

Any increase in forced sales would act as a further drag on house prices, experts say. House prices have already fallen by nearly 7 per cent since the market turned in October, pushing thousands of borrowers into negative equity.

Tenants are also likely to feel the pain if mortgage rates continue to spiral. The cost of renting a home has already risen by 6.15 per cent in the past 12 months, according to a recent survey conducted for The Times.

Analysts gave a warning last night that increased housing costs for homeowners and tenants, coupled with rising utility and food bills, could spark a rise in the number of households struggling with bad debts, which in turn could lead to a greater scarcity of mortgage deals.

Vicky Redwood, of Capital Economics, an economic consultancy, said: “It will not be long before debt problems become far more widespread . . . While those struggling to repay their debt will probably cut back their spending, rising defaults are [also] likely to make lenders more cautious about extending new credit.”

Howard Archer, of Global Insight, an economics consultancy, said: “Ongoing very low housing market activity seems certain to feed through to further depress house prices.

“We see extended downward pressure on house prices coming from serious buyer affordability constraints, limited and often more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and reduced prospects for further interest rate cuts in the near term at least.”

According to the Council of Mortgage Lenders (CML), three-month arrears on buy-to-let mortgages increased slightly across all banks in the first quarter of 2008 to 0.9 per cent of loans, compared with 0.73 at the end of last year. A spokeswoman for the CML said that banks had all been expecting a slight increase in bad debts. “Demand is still strong and the buy-to-let market is counter-cyclical, as when people don’t want to buy, they want to rent,” she said.

Gráinne Gilmore, Economics Correspondent