UK Banks and Building Societies are currently in a phase of recapitalisation, and continue to be reluctant to lend where there is any perceived increase of risk. This cautious approach is also reflective of shareholder and public opinion, media attention, and of senior management teams who are trying to keep the skin on their arses during this period of recession – which may well last into 2010.

Why are lenders still restricting access to finance?

The current range of government backed incentives has not proven to be enough to break this mindset, and the range of available mortgage products is still reducing. Many existing loan products have also been subjected to reductions in loan to value ratio (LTV) as lenders place greater emphasis on sharing the risk of house buying with the purchaser.

Finance on new build housing has also been restricted, with many lenders simply unable to accept the risks of theoretical valuations based on geographical norms, rather than factual sales history. Indeed, the few lenders still active in this sector of the market are guiding their RICS Valuers to be exceptionally cautious, putting pressure on the cash flow of developers across the UK. Tighter restriction has also been placed on lenders exposure to individual developments, with the maximum number of units per development site reduced sharply to further control risk.

What will signal a change in lending criteria?

The bank LIBOR rate (the rate at which banks lend to each other) has tracked downwards and become more stable over recent weeks, which will lead to more confident decisions over time. In the end, lenders HAVE to lend to make money and banking is a competitive industry driven by product range – as with any other retail sector.

I would expect the UK Government (keeping in mind that an election may be due next year) to step in to the mortgage market via their Northern Rock vehicle to stimulate competition. £14 Billion has been set aside for this purpose already, and the timing could be sweet for Gordon Brown. The reintroduction of a 90% LTV mortgage product would provide a boost to housing activity, and force other lenders to take calculated risks to remain competitive. I would not expect these products to attract low interest rates – and I foresee NO chance of 100% lending returning to the UK market for the next few years at least.

What may happen to interest rates in the medium term?

I believe that interest will remain close to 0.5% to Zero for the rest of 2009, with no particular motive for them to move sharply in either direction. There is little current threat from inflation (indeed deflation remains a concern in the short term), and the use of headline interest rates to control inflation is exhausted anyway. Mervyn King, the Governor of The Bank of England, has already stated that he agrees with this view.

From 2010 onwards interest rates will probably have to climb, as the wider economy tries to get back on its feet, and it would be worth careful consideration on fixing any new mortgage loans for 2 – 5 years to capitalise on this factor.

If you are interested in following long-term interest rates I’ve found a great resource at Swap-Rates.com

What’s the conclusion?

Properly financed home buyers and investors, with well managed credit ratings, will still have little trouble in getting mortgage funding. Buyers can expect to have to satisfy greater scrutiny of their ability to repay any new lending (but is that a bad thing?), and they will need access to good advice and a wide range of lending sources to get the best deals. Fixed rate mortgage products could be actively considered now, as any future movement of base interest rates may well be upwards from the historically low figures we are experiencing right now.

The Government will stand or fall on its management of the economy over the next 12 months, and house prices are dear to voters hearts – so expect to see some concerted action to free up lending and stimulate house sales activity!