Banks 'fixing house prices'

TWO of the biggest banks are restricting mortgage loans in boom areas where they fear the housing market could collapse. NatWest and Alliance & Leicester are limiting the amounts that can be borrowed on some properties in postcodes where prices have rocketed in recent years.

Among the areas affected are swathes of London, Oxford, Brighton, Portsmouth and St Albans. The banks want to reduce their risks because of fears that they may be left with bad debts if there is a downturn in the market. They also want to protect homebuyers from over-extending themselves and ending up in negative equity.

Rival lenders are worried that limiting loans could drive down property values in these hotspots. The Halifax will raise the issue with the Council of Mortgage Lenders. It said: 'We want to ensure that others do not follow suit.'

The fear is that sellers could have to cut their prices to enable buyers to get a mortgage. Critics say the need to find a bigger deposit might stop first-timers getting a foot on the property ladder at all.

One analyst asked: 'How can a bank one week accept a mortgage application then change its mind a week later because of a postcode? It is discrimination and could push down prices'.

Ray Boulger of leading independent financial adviser Charcol, said: 'If a major lender restricts lending in certain areas, it could affect property values.'

Prices nationally rose more than 12% last year, but some areas experienced much bigger rises. In Greater London they soared by 17%, the Halifax estimates. Experts accept that in some cases, they will fall again.

Banks will usually lend up to 95% of a property's value but NatWest and Alliance & Leicester have cut this to a maximum of 90% in certain hotspots. This means a borrower wanting to buy a £250,000 property would have to find an extra £12,500 deposit.

But the ruling does not apply to every street within a postcode, only to those showing the biggest rises. At Alliance & Leicester the policy applies to properties valued at £100,000 or more.

The bank reviewed its policy after the 11 September terror attacks amid fears for the economy. A spokesman said: 'We are concerned about what could happen. House prices in these areas could fall and people could find themselves in difficulty. Negative equity is a problem for customers and for us.' It is now reviewing the policy again.

At NatWest, one customer was told last week that her mortgage application would be referred to a 'sanction team' because she was buying a flat in Tufnell Park, North London. Having originally asked her for a deposit of 6%, or £10,000, the bank later demanded 15%.

Charles Haresnape, head of mortgage sales, said: 'We think it's prudent to reduce the maximum amount we will lend relative to the value of a property in some cases.'

The NatWest adopted a similar attitude after the last housing market collapse but this is the first time the Alliance & Leicester has done so. Experts claim other lenders, including the Bradford & Bingley and the Royal Bank of Scotland, have acted similarly in the past.

More are now expected to follow suit. One former building society director warned: 'We may eventually see different mortgage rates for different postcodes.'

The Financial Services Authority has warned that current lending practices may be over-generous. Once, borrowers were offered at most three times their salary or 2.5 times joint incomes. Now some lenders offer up to five times salary. Homebuyers also have more non-mortgage debt than in the last boom.