Fear of domino effect as banks restrict mortgages

Fears grew yesterday of a domino effect among leading lenders after NatWest and Alliance & Leicester revealed they were forcing homebuyers in certain parts of the country to put down larger deposits.

Halifax, Britain's biggest home loans company, said it raised the possibility of significant numbers of lenders withdrawing from particular areas, leaving these places effectively blacklisted.

NatWest and A&L have decided to limit the amounts they are prepared to lend to people buying homes in areas which have seen very strong price growth. Halifax said yesterday it was writing to the industry's main body to express its concern. A spokesman said the two banks' actions looked like "discrimination".

NatWest and A&L yesterday defended their policies. They have both reduced the maximum amount they will lend in some cases because of fears the booming property market could collapse, leaving homeowners in negative equity.

Banks will usually lend up to 95% of a property's value but A&L said it now required buyers to have a deposit of at least 10% on homes costing more than £100,000 in London and across the south-east.

NatWest has taken a slightly different approach and is applying the 10% minimum deposit rule to an undisclosed list of areas where house prices have risen particularly strongly. It said these were "small localised areas" - in some cases clusters of streets - but refused to give any more details. However, it is likely that as well as including many parts of London, property hotspots on its list will include parts of Norwich and Bournemouth.

A NatWest spokesman said that in areas which have seen a disproportionate increase in prices, the chances of house prices falling were greater and "there is a risk the customer could find themselves with negative equity". He added: "We must ensure we act in the interests of our customers."

A&L, the sixth largest lender, said it had decided to act because London and the south-east had experienced price rises well above the national average.

But the Halifax said it had written to the Council of Mortgage Lenders expressing its concerns, saying their actions could have knock-on effects for the housing market. First-time buyers would be hardest hit because many will find it hard to raise a 10% deposit.

Halifax said that a decision by any lender to withdraw from a segment of the market simply means the risk is transferred to other banks and building societies.

"If other lenders were to follow suit and this was to become a trend, we could see significant numbers of lenders deciding to withdraw from particular areas of the country," said a spokesman.

The Halifax said there was already a mechanism in place to control mortgage lending in the form of the calculations lenders carry out into a borrower's ability to pay given their credit history, their income and the price of the property. "A lender should not dictate where a borrower can or cannot buy a house," the spokesman said.