This is according to the latest Mortgage Monitor from e.surv chartered surveyors, which showed that increasing funding costs have forced banks to reduce their lending to borrowers with small deposits.
The Mortgage Monitor shows there were 7% fewer purchase approvals than in March last year - the first year-on-year fall since May 2011.
The drop also represents an 11% fall on the number of approvals in February. It is the second successive month in which approvals have fallen, suggesting the market is beginning to regress after a period of growth.
The fall was driven largely by a sharp drop in lending to first-time buyers. Loans for purchase of the cheapest property – typical first-time buyer homes – fell 14% in March to their lowest level for 15 months.
There were only 10,428 loan approvals on property worth up to £125,000 in March, down from 12,247 in February.
First-time buyers were the hardest hit as banks reduced the availability of high loan-to-value mortgages in response to increasing funding costs and tightening credit conditions.
Tighter criteria on high loan-to-value mortgages meant lending to borrowers with a deposit of 15% or under accounted for only 10% of all loans in March – well down on the three month average of 13% - and falling from 12% in February.
March was the fourth consecutive month in which lending to borrowers with small deposits declined. There were only 4,432 loans to buyers with a deposit of 15% or under, compared to 5,829 in February – a fall of almost a quarter.
Commenting, Richard Sexton, director of e.surv, said, “Up until now high-street mortgage lenders have been able to absorb steadily increasing costs rather than passing them onto the consumer.
“The tactic boosted activity during last autumn and early part of this year, albeit artificially, and veiled a multitude of underlying weaknesses in the market. Now that the banks can no longer afford to take on extra costs, those weaknesses are beginning to come to bear once again.”
Sexton believes that a challenging period lies ahead for buyers, particularly those on low incomes and with small deposits.
“Mortgage lenders’ balance sheets are groaning under the weight of increased funding costs and it is no surprise that a range of banks are changing their SVRs,” he said.
“In the Bank of England’s latest survey of credit conditions, the banks reported a fall in mortgage credit for the first time since spring 2010. As a result, banks are tightening their criteria and putting up rates on some of their fixed term mortgages.
“We are also seeing a severely weakened appetite for interest-only mortgages, driven in part by focus from the FSA on the sustainability of these mortgages in the longer term.
“Mortgage availability will continue to fall in the next three months and banks have admitted borrowers with small deposits will be hit the hardest. This has already begun to happen, with markedly fewer loans in March to first-time buyers and a sharp drop in high loan-to-value lending.”
Mark Abrahams, CEO of West One Loans, agrees: “High street banks have reported an increase in demand for mortgages this year but have admitted they won’t be able to cater for it,” he said.
“First-time buyers will suffer as will buy-to-let investors. Brokers should take heart that this should fuel the bridging sector: it will encourage more investors to use bridging loans to finance projects.”
