Friday May 9, 06:00 PM
Borrowers face higher rates and lower limits
By Sharlene Goff and Steve Lodge
Banks and credit card companies are shying away from riskier customers by lifting rates and lowering credit limits - adding to borrowers' woes after the Bank of England decided not to cut the base rate this week. Mortgage borrowers with
low deposits are being hit with interest rates 1 percentage point higher than those for loans of up to 75 per cent of a property's value, while new credit card applicants are seeing their spending limits restricted."Borrowers with small deposits or limited equity are now paying the sorts of rate premiums that sub-prime customers could have been paying a year ago," said Ray Boulger, senior technical manager at John Charcol mortgage brokers. Prior to the credit squeeze, borrowers seeking loans for 90 per cent-plus of a property value would have faced additional costs of less than half the current one percentage point, he said. The two base rate cuts of recent months have done nothing to help riskier new borrowers. Average mortgage rates for borrowers with deposits of no more than 10 per cent are significantly higher than three months ago even though base rate has since dropped half a point. The average two-year tracker rate for borrowers with a 10 per cent deposit is now 6.4 per cent, up from 6 per cent at the beginning of February, according to Moneyfacts.co.uk. The Bank (NASDAQ: TBHS - news) 's decision on Thursday to keep rates at 5 per cent for at least another month also means mortgage costs are unlikely to ease in the short term. Alliance & Leicester this week joined other large lenders in introducing tiered pricing that penalises those borrowing more than 75 per cent of the property value. "Lenders are being ultra cautious and becoming increasingly tight on risk," said Melanie Bien, director of Savills Private Finance, the broker. "By reining back maximum loan-to-values and offering punitive rates of interest to those who don't have sizeable deposits, they are trying to avoid what they regard as riskier borrowers." Boulger added that with property prices softening, some remortgaging borrowers could face a double whammy from the general increase in new loan rates and being considered higher risk. He said that while the key trigger points for higher rates were 75 and 90 per cent loan-to-value, lenders could introduce a new band at 60 per cent. Meanwhile, credit reference agencies say card providers are quietly reducing maximum spending limits for new customers who they fear could run into payment difficulties. Borrowers, who a year ago may have automatically qualified for a limit of £10,000 or more are now being granted significantly lower limits. "Lenders are taking the opportunity to be more vigilant in terms of what they are providing to customers," said Melanie Mitchley, director at Callcredit, the credit reference agency.
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