Priced out of market by postcode

LONDON'S first-time buyers who live in the wrong postcode may find it increasingly hard to find a mortgage, following a move by lenders which may bode ill for the capital's housing market.

The Royal Bank of Scotland (RBS) says about a third of Greater London has reached its maximum value and therefore it is too risky to hand out loans without a large deposit from the buyer.

RBS is the third lender to be discovered adopting this practice, joining NatWest and Alliance & Leicester, who were revealed in January to be discriminating between postcodes. An internal document used to give guidance to the bank's mortgage consultants, obtained by specialist magazine Money Marketing Focus, reveals that RBS has altered its maximum loan to value ratings in 52 London postcode areas.

The document says 'hot-spot' areas in which the policy applies translates approximately to Camden, Newham, Hackney, Haringey, Harrow, Lewisham, Southwark, Waltham Forest and Wandsworth.

Loan-to-value (LTV) is the jargon used by lenders to describe the amount of loan they will make on a house - thus a LTV of 90% on a house worth £200,000 leaves the first-time homebuyer having to find a deposit of £20,000.

The document, dated last month, says the maximum LTV for amounts between £150,001 and £200,000 - the average price of a Greater London home is £180,000 - has been increased from 85% to 90%. In all other areas, the loan-to-value for the same amount would be 100% to £150,000 and 95% up to £200,000.

The lender quotes the UK Halifax House Price Index in Greater London, which increased by 17% in 2001 compared to the UK average of 7.7%.

'High price inflation has historically given rise to a higher risk of price volatility and price falls,' says the document. 'The policy has been agreed,' it adds later, '... given the current economic uncertainty.'

In January, Alliance & Leicester and NatWest, a subsidiary of Royal Bank of Scotland, were found to be restricting their loan-to-values according to postcode areas. Both companies issued statements justifying their policies.

NatWest's policy came to light when a borrower was told she could be lent up to 85% of the value of a property she was buying in Tufnell Park. Yet the lender had agreed a 95% loan-to-value mortgage in principle, thus leaving the borrower having to find thousands of extra pounds for a deposit.

Alliance & Leicester says the economic uncertainty following 11 September persuaded it to put its policy in place. It revised its lending policy on properties worth between £100,000 and £250,000 in London and the South East and now lends up to 90% of property values. Andrew Homer, press manager at Alliance & Leicester, says that before that, the company would lend up to £250,000 at 95% LTV.

NatWest said it would restrict the percentage advance by a small amount 'where there has been a disproportionate increase in house prices in highly localised areas'.

Other lenders owned by the Royal Bank of Scotland, Direct Line and Virgin One say they do not impose restrictions on borrowing based on postcodes. Scott Mowbray, at Virgin One, said: 'We're aware of the so-called hotspots. If lenders say they're not aware or don't monitor them, then they're not being entirely open. There are certain areas where the market has topped out and there are people looking to buy in those areas without a deposit. It's not prudent to get into that sort of lending.'

The Halifax, Britain's biggest mortgage lender, strongly opposes such policies and threatened to report Alliance & Leicester and NatWest to the industry's regulatory body, the Council of Mortgage Lenders.

'We're concerned because it restricts the free market. It could end up creating a problem in a certain area by restricting the number of buyers. The price of the properties could fall,' said Jason Clarke, Press officer at Halifax. He points to the house price index survey that the Halifax produces monthly. 'How can they make a decision on specific postcodes based on our information? There are too many variables that can come into play at a local level.'

David Hollingworth, of leading broker London & Country Mortgages, said: 'We are not overly concerned for first-time buyers until other lenders, such as the Halifax, start to do this. There has been a big surge in property prices in most boroughs of London, however, and it cannot go on. Our view is that prices will just flatten rather than collapse.'

The Council of Mortgage Lenders dismissed the policy as 'a commercial matter'. A spokeswoman declined to comment on what action it would take if the policy became widespread. A spokeswoman for RBS declined to comment.

Laverne Hadaway is the editor of Money Marketing Focus magazine.