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Budget deficit will increase cost of mortgage lending, says AMI

The Association of Mortgage Intermediaries has released its latest Quarterly Economic Bulletin which says the Budget deficit will continue to drive up cost of mortgage lending.

The bulletin sets out concerns over the size of the UK budget deficit and the long term impact on the nation’s finances. It states that the size of the structural deficit will require a severe squeeze on public spending and the prospect of widening the tax net, if not increased tax rates.

The report suggests that gross mortgage lending will be around £150bn for 2010, slightly ahead of the £143bn managed in 2009, but still far below the £363m peak in 2007. It predicts net lending in 2010 of around £20bn, with slowing redemption levels.

Robert Sinclair, director of AMI, says: “Whoever forms the next government must put in place real debt reduction plans. The cost of funding the current levels of borrowing will be a continual drain on the economy and drives up the cost of lending between banks.

“This continues to make new mortgages look less attractive than the current default rates many consumers are enjoying after their fixed term deals end.  However, this equilibrium in mortgage markets will only last while base rates stay very low.

“In the medium term, a bout of inflation might start to look attractive to politicians if it becomes impossible to control the deficit and bring down the national debt through higher taxes and lower spending.  It would represent a painful transfer of wealth from savers to borrowers, reducing the value of debts relative to earnings, but eroding the value of savings in the process.  Of concern to the Treasury must be house price inflation running towards double digits, but latest trends are that this is slowing considerably.

He adds: “Remortgage levels remain low, but if we are to see a real improvement in the mortgage market throughout 2010, the Government needs to work harder to get lenders lending again.  There is a distinct need to ensure that the intermediary sector continues to be supported, in order to provide customers with the full range of advice and help to review all the options available to them.”

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