Credit squeeze is tightening the mortgage market but proving fruitful for building societies

21 November 2007
The mortgage and lending markets are suffering at the hands if the recent credit crunch, which is seeing banks tightening their lending criteria and borrowers cutting back on spending, but building societies are experiencing record deposits as savers lose faith in the banking system.

The Northern Rock fiasco has taken its toll on consumers' confidence levels in banks, leading to a record £30 billion being paid into building societies in October. Commenting on the figures, Adrian Coles, Director-General of the Building Societies Association said: “It seems that the majority of these deposits are funds withdrawn from the Northern Rock bank.

“At £3,024m October net receipts for building societies were the highest monthly figures ever, beating the record of £2,821m set last month, and almost four times the £772m deposited in October 2006.”

However, mortgage providers and other lenders are having the opposite credit crisis experience, with America's second biggest guarantor of home loans, Freddie Mac, finding itself exposed to liquidity issues, announcing a $2 billion quarterly loss, and an $8.1 billion drop in value, seeing shares collapse by 25 per cent.

The Council of Mortgage Lenders has revealed that mortgage lending in the UK has been subdued recently, despite growing nearly six per cent compared to September, but it is believed that the full effect of the credit crunch will not be felt immediately. Michael Coogan, Director General at CML, said that the next few months will be a "testing time" as ongoing pressure and instability in financial markets trickle into the economy.

"Funding constraints will continue to restrict lending activity and make loans more expensive. The Bank of England’s recent Quarterly Inflation Report reinforced the likelihood of a reduction in rates early next year, and that should provide some relief for borrowers sooner rather than later.” he said.

Mr Coles at the BSA said of the recent mortgage market: “Although building society lending in October was greater than in previous months, activity is still subdued in comparison to last year, with gross advances amounting to £4,654m in October, compared to £4,936m in October 2006. The mortgage market looks set to cool further as the impact of the higher interest rates and tighter credit conditions more generally continue to feed through.”

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