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Mortgage Borrowers Feel Brunt of Credit Crunch    
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By Ellen Kelleher, Elaine Moore and Sharlene Goff , The Financial Times

The dual effects of the rising cost of mortgages and the tightening of lending requirements is likely to further exacerbate the UK housing market slowdown in the coming months, analysts have said. Rising borrowing costs are leaving banks struggling to find the money to fund new mortgages. More lenders have been adding on higher arrangement fees, nudging up rates and imposing stricter lending requirements as a result.

“The punitive effect of five interest rate rises is now taking effect,” observed Ray Boulger, senior technical manager at mortgage broker John Charcol. Richard Barker, product manager at Norwich and Peterborough building society, reported that origination fees on two-year, fixed-rate mortgages are now as high as 2 to 2.5 per cent. For example, Cheltenham & Gloucester offers a low rate of 4.98 per cent for a two-year fixed rate, but tacks on a 2.5 per cent arrangement charge. Meanwhile, Chelsea building society charges a rate of 4.99 per cent and a 2.5 per cent fee.

Two years ago, a borrower could expect to pay a rate of 4.25 per cent for a similar deal and an arrangement fee of just £500-£600. “Some lenders have tried to negotiate the increase in interest rates by keeping payable rates low, but increasing their fees significantly,” said Barker. Three-month interbank interest rates – the price at which banks borrow from each other – hit 6.59 per cent this week, a level not seen since the week the Treasury stepped in to save Northern Rock depositors.

Raised borrowing costs are dealing a severe blow to smaller lenders, who have few alternative financing options, the Council of Mortgage Lenders said this week. Lending requirements are becoming stricter as mortgage companies look to cut loan-to-value rates and “clean up” their mortgage books by weeding out less creditworthy customers, pointed out Jonathan Cornell, managing director of Hamptons Mortgages. He said: “Lenders are finding it harder and harder to securitise subprime mortgages, so they are trying to make their subprime books cleaner.”

Lenders such as Accord Mortgages have cut loan-to-value rates for medium and heavy adverse borrowers to 75 per cent, down from 85 per cent. They have also reduced the number of county court judgments acceptable. C&G has changed the rates for its higher LTV products of 90 to 100 per cent, as well. Its two-year fixed-rate mortgage with £995 fee for LTVs in this range is up from 6.38 per cent to 6.58 per cent. And its two-year tracker is now 6.48 per cent with a £995 fee instead of 6.28 per cent.

Analysts expect other lenders will begin to charge steeper rates for higher LTVs, leaving the competitive rates on LTVs of 75 per cent or less.Melanie Bien, director at mortgage broker Savills Private Finance, said: “Lenders would prefer to focus on low LTV business because it is lower-risk.”And a growing number of lenders are looking to scrap personal loans and steer clear of unsecured lending. Two lenders – Hanley Economic building society and Eskimo Loans, a group funded by Northern Rock – moved to withdraw personal loans from the market this week. Similar moves were made earlier this month by GE Money and Liverpool Victoria.

Esther James, personal finance analyst at Moneyfacts.co.uk, the price comparison website, said: “Such a large reduction in just the last month is worrying. With no signs of rate rises slowing, it’s a rather unsettled market. The credit crunch is showing its strength in the personal loan market.”

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