British bank First Direct has withdrawn mortgages for new customers to clear a backlog after people flocked to its relatively cheap rates as other lenders raised rates due to the credit crunch.
Although the suspension is expected to be temporary, it is another blow for consumer choice which has suffered dramatically in recent weeks as banks in Britain have withdrawn thousands of cheaper mortgage offers.
AP
It comes as mortgage approvals languished near decade lows in February, according to Bank of England data.
"These are really strange times, I don't think the mortgage industry has ever witnessed anything like this," said Andrew Hagger, a spokesman for Moneyfacts, which provides online comparisons data on mortgages.
Independent broker Savills Private Finance expects lenders to raise mortgage rates further in coming months to deter consumers, because their own access to funds is restricted.
"Things are getting more serious all the time," said Savills director Melanie Bien.
"The worrying thing is even if there is a base rate reduction (by the Bank of England) it won't have that much of an impact because the link between the base rate and the mortgage rate has been all but severed because of a lack of liquidity in the market," she said by phone.
First Direct would not give figures on how many mortgages it arranges, but is believed to handle above 1.5 percent of the total UK mortgage market, according to Ray Boulger, senior technical manager at online mortgage lender Charcol.
It has stopped offering mortgages for a short period, not expected to be longer than a few weeks, to clear an administrative backlog after receiving five times the normal number of mortgage applications, a spokesman said.
"We're famed for service and we're not prepared to accept that kind of disruption to our customer service (while processing the applications)," said First Direct press officer Rob Skinner by phone.
Commentators speculated First Direct could tighten lending criteria when it starts offering mortgages again, possibly in May. The bank has done the best thing for its reputation by suspending mortgages rather than hiking rates, they said.
The bank, owned by HSBC, does not have branches and customers do all their banking over the phone or online, allowing it to save costs and offer cheap rates.
In the last month alone, more than 2,000 mortgage products have been withdrawn, with the number of products on offer dropping to 5,700 from 7,726, website Moneyfacts said last week.
Make More Money Available
Moneyfacts' Hagger suggests the Bank of England (BoE) should make more money available to mortgage lenders to prevent the problem of tightening lending from snowballing, which could in turn hit property prices.
The BoE pumped an extra 5 billion pounds ($9.9 billion) in weekly loans into the interbank market last month.
Extra customers are inundating First Direct and the UK's second-biggest mortgage lender Nationwide because those with fixed rate mortgages which expire later this year are panicking and rushing to get deals well before time because the better deals are evaporating, Hagger said.
Mortgage approvals for house purchases fell slightly less than expected to 73,000 in February, from 74,000 in January, but still remain near decade lows, according to Bank of England data released Wednesday.
First Direct's most popular offer was a 4.95 percent 2-year fixed rate mortgage, which it last week raised from 4.75 percent.
While the backlog is being cleared, parent company HSBC will step in to offer new customers a 2-year fixed rate mortgage at 4.99 percent, Skinner said.
The nearest offers are Cumberland building society's 5.28 percent 2-year fixed rate mortgage and Derbyshire building society's 5.29 percent offer, according to Moneyfacts.