SAM FLEMING COMMENT: Mortgage tap is firmly shut

By SAM FLEMING FOR MAILONLINE
Updated:

Northern Rock's 'Together' mortgages ranked among the most noxious innovations of Britain's mortgage bubble.

So the notion that Nationwide, a supposedly conservatively run building society, could be following in the footsteps of ex-Rock chief Adam Applegarth - an executive from the Jacques Clouseau school of banking - is on the face of it rather alarming.

But any similarities between Northern Rock's long-abandoned super-sized Together loans and Nationwide's new 125 per cent product are entirely superficial.

Northern Rock

Suicidal: Northern Rock's Together mortgages were 'noxious', says Sam Fleming

Under the broken Rock's suicidal scheme, new buyers were offered a 100 per cent mortgage coupled with an unsecured loan worth up to 25 per cent of the property's value to help with things like stamp duty and furniture. Genius idea - as long as house prices rise in perpetuity.

Nationwide's offering  -  in its own words a 'niche' product  -  is being offered to existing customers whose homes are worth less than their debts.

Far from injecting new blood into the mortgage market, it effectively allows a handful of existing customers the chance to carry their negative equity with them when they move.

It is being offered at punishing rates of around 7 per cent - perhaps providing Nationwide with a canny way of weaning people off ultra-low deals.

But as yet, not one Nationwide customer has signed on the dotted line. The handful that do may end up using it as a vehicle for trading down to a more inexpensive house.

If property values continue to tumble, loans like this could get people into even deeper trouble. But Nationwide's offering is clearly not a symptom of a new surge of euphoria in banking. 

Indeed, if anything negative equity loans are emblematic of the desperate state of the housing market. Lenders remain chronically conservative, and the supply of credit remains at a trickle.

Deals like Nationwide's 125 per cent mortgage are unavailable to first-time buyers, who are finding it horrendously difficult to get into the property market.

As a Council of Mortgage Lenders report showed yesterday, only 20 per cent of young first-time buyers are currently able to purchase properties without parental help.

And overall the number of new home loans agreed in May was a mere 37,400, compared with a longer-run average of 96,000 a month.

Meanwhile, Bank of England figures show lenders are continuing to charge punitive rates on both secured and unsecured loans, when compared with the super-low official cost of borrowing.

At nearly 19 per cent, the average overdraft rate is now the highest since its data began in 1995.

This either suggests that banks are struggling to raise funds, or it indicates they are squeezing the life out of their customers as they attempt to build up profits and reduce debt on their tattered balance sheets.

The reality is a bit of both. The days of generous Together-style loans are long gone. 


The Lady's for Turning

Moribund lending markets haven't stopped the Bank of England from wrong-footing the markets by signalling that the days of quantitative easing are drawing to a close.

Traders had expected the Bank to expand its asset purchase scheme by £25billion to its £150billion ceiling.

There was also a suspicion that governor, Mervyn King, would write to the Chancellor asking that ceiling to be lifted. Wrong on both counts.

For people fretting that the Bank was paving the way to Weimarstyle inflation, this will come as a huge relief.

But the implications for the markets, and for the Treasury, are pretty grim. Gilt prices have been kept artificially high, and yields low, by the Bank's purchasing programme  -  which was part of the point of QE.

But hints of a policy reversal are already sending jitters through the market, and could trigger a broadranging increase in market interest rates.

This could snuff out Britain's recovery just as it begins, leading to that infamous double-dip recession economists are fretting about.

On top of this, the Bank has used the bulk of the £112billion it has printed to buy government debt from banks, insurers and other financial institutions.

For a Treasury that wants to flog £220billion of gilts this year, this additional demand has been a godsend.

If we are moving towards the endgame, worries will intensify fears about the government's ability to finance its Everest-like borrowing requirement.

This might finally force some honesty out of Labour on the need for draconian public spending cuts. But it is hardly a recipe for celebration.

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