Gross Mortgage Lending

This graph shows the sharp decline in mortgage lending since the onset of the credit crunch.

Banks have been unable or unwilling to lend because:

Falling house prices mean there is greater risk of negative equity. Therefore banks have been requiring higher deposits making it more difficult for people to buy a house

Lack of funds. Many of the big 4 banks have had to write off substantial bad debts resulting from the credit crunch and subprime mortgage fiasco. Even despite quantitative easing, banks have been unwilling to lend.

Lack of willing homebuyers. Although interest rates of 0.5% make buying a mortgage attractive, homeowners have been put off buying a house because of the scale of the recession and the high levels of unemployment.

The low levels of mortgage lending have led to low levels of activity in the housing market.

Future Mortgage Lending

As house prices stabilise, we are likely to see a rise in future mortgage lending, as banks reduce the deposit required.

Also, economic recovery would reduce the amount of mortgage arrears and increase confidence of consumers to buy a house. However, unemployment is likely to lag behind economic growth so this could take a while to occur.

The Advantages of a large Mortgage deposit include:

Protection against negative Equity. With house prices predicted to fall in the UK, a small deposit could leave homeowners vulnerable to negative equity. Suppose you bought a house for £100,000 with a deposit of 5% and a mortgage worth £95,000. If house prices fell 12%, your mortgage would be worth £95,000 but the value of the house would be £88,000. Therefore, if you had to sell the house then you would still owe £7,000 to the mortgage company. This is one reason why banks are currently wanting bigger mortgages; they fear that the combination of the credit crunch and falling prices could lead to negative equity and potentially they could lose out on home repossessions.

Lower Interest Rates If you can save a deposit of 25%, you are likely to get a much lower interest rate on the mortgage. If you can only save the bare minimum, many banks are currently charging a premium to insulate themselves against the prospect of falling prices.

The difficulty is that saving a large deposit is easier said than done. These are some tips on saving for a mortgage