U.K. Mortgage Supply Increases as Banks Offer Riskier Loans

U.K. banks boosted mortgage availability and lowered borrowing costs in the second quarter and signaled they may increase the supply of riskier loans, according to the Bank of England.

An index of home-loan availability rose to 17.4 from 17 in the first three months of the year, the BOE said in its Credit Conditions Survey published in London today. An expectations index for the third quarter was at 17.2. The central bank said banks seeking greater market share drove the increased availability.

The survey also showed that banks have become more willing to offer higher loan-to-value ratios on mortgages as a new government program helps home buyers. BOE Deputy Governor Paul Tucker said yesterday that Chancellor of the Exchequer George Osborne’s property measures pose a medium-term risk to financial stability and shouldn’t be a permanent subsidy.

“Lenders expected their willingness to lend at 90 percent LTV ratios and above to increase,” the BOE said. “Consistent with this, average credit quality was expected to deteriorate slightly in the third quarter. Some lenders noted that the government’s Help to Buy Scheme should facilitate more lending at high LTV ratios.”

Speaking to lawmakers, Tucker said the BOE’s Financial Policy Committee will monitor the impact of lending programs and he expects it to act if there are any signs of a bubble that could jeopardize financial stability.

A measure of mortgage demand jumped to 43.5 in the second quarter, the highest since 2009, from 6.4, according to the BOE. On mortgage pricing, spreads on home loans fell “significantly” for a third consecutive quarter in the three months through June and will decline again this quarter.

Company Credit

The pound rose after a separate survey showed U.K. services growth accelerated to its fastest pace in more than two years in June. Sterling advanced 0.6 percent against the dollar and traded at $1.5240 as of 10:07 a.m. in London.

The BOE report also showed that credit availability for companies improved in the second quarter, though large firms saw the biggest improvement. Availability for small companies “increased slightly” and lenders reported that the proportion of small business loans being approved had risen, the BOE said. Banks expect total corporate credit availability to be “little changed” in the current three months.

Still, the “changing economic outlook was expected to push up significantly on credit availability, with market share objectives remaining supportive,” the BOE said.

The central bank also said that while default rates on loans to medium and large companies were little changed in the three months through June, they rose “significantly” for smaller companies.

Losses given default rose for small- and medium-sized companies, though “no significant changes” in loan performance are forecast for this quarter.

The BOE survey was conducted between May 10 and May 31.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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