First Direct shuts doors to new mortgage customers

Rupert Jones and Patrick Collinson The Guardian,
Wednesday April 2 2008

First Direct said it was taking the 'drastic' step after being overwhelmed with applications

One of Britain's best-known banks, First Direct, shut its doors to new mortgage customers last night amid a growing exodus by lenders that is likely to force up borrowing costs for all home buyers.

First Direct said it was taking the "drastic" step of pulling out of offering mortgages to anyone other than existing customers after being overwhelmed with applications for its home loans following recent price increases by other leading lenders.

Several other lenders, including NatWest and Scottish Widows, also increased borrowing costs yesterday or tightened their lending rules, raising fears that all first-time buyers will soon require a minimum 10% deposit in order to get on to the housing ladder. That would mean a typical new buyer in London would have to save up around £25,000.

The clampdown on lending will contribute to the fast-evaporating confidence in Britain's property market. Yesterday the Land Registry said the number of properties sold in the final quarter of 2007 was down by nearly a quarter on the year before. Earlier this week Nationwide reported the longest run of monthly falls in house prices since the depths of the property crash in 1992.

First Direct, owned by HSBC, said the decision to temporarily withdraw its mortgages from sale was "not a funding issue" but aimed at restoring normal standards of customer service. It added that it would resume offering home loans to new customers when it had cleared the backlog.

In the boom days of lending, banks and building societies fought to offer the most competitive rates and sign up as many customers as possible, but the credit crunch has flipped that business model on its head. In recent weeks lenders have rushed to withdraw their best mortgage offers because of the difficulties in obtaining funds, and the shrinking number of players offering even vaguely competitive deals are finding themselves swamped with business. When one pushes up its rates or pulls down the shutters, "the next lender in line gets hit with a deluge", said David Hollingworth at mortgage broker London & Country.

First Direct's move may be linked to the decision by Nationwide and other lenders late last week to raise their rates for new customers. Nationwide upped the cost of some of its tracker mortgages by 0.57%, despite expectations that the Bank of England will cut interest rates next week.

First Direct last week pulled its "best-buy" two-year fix which was priced at 4.75% and replaced it with a more expensive offering. Brokers are now waiting to see if yesterday's moves have further knock-on effects as home buyers and those looking to remortgage are forced to go elsewhere.

Chris Pilling, First Direct's chief executive, said: "The flood of interest in our mortgages has meant we're taking longer than we'd like to handle applications, especially from non-customers. Rather than increase interest rates dramatically to discourage new applications, we've decided to withdraw temporarily from offering mortgages to non-customers until we've cleared the backlog."

Growing numbers of existing mortgage customers also face the prospect of higher mortgage bills. NatWest and Royal Bank of Scotland have written to thousands of customers with "offset" mortgages to tell them that as of today, the rate they are paying will rise by 0.25% - to either 6.45% or 6.95%.

The withdrawal of some of the most competitive deals from the mortgage market is yet more bad news for the 1.4 million borrowers who are expected to come off their current fixed-rate deals this year. ... .mortgages