The ongoing evolution of the UK mortgage market was dramatically illustrated this week with figures from the Council of Mortgage Lenders (CML) showing that remortgaging accounted for only a quarter of home loans in August, the lowest proportion in more than a decade.

Banks have once again tightened their lending criteria in recent months amid fears that higher unemployment will result in home owners defaulting on their loans. Many home owners are therefore unable to remortgage and are switching to their lender’s standard variable rate at the end of their initial deal.

The CML says the low levels of remortgaging will result in a “quiet” housing market in the coming months. August is a traditionally slow month for mortgage lending and it was no different this year. Similarly, while we do not know what the impact of the comprehensive spending review will be on the mortgage sector it will almost certainly contain austerity measures that will likely further dampen consumers’ appetite to borrow.

Analysts expect lending to slow more significantly as the end of the year approaches and it is unlikely that the cautious environment will encourage mortgage activity seriously to pick up in 2011. This means analysts believe there will be a muted market for the next few years.

Borrowers hoping that lending conditions return to the heady days of 2007, where deposits were not required and income didn’t need to be proven, are going to be disappointed. The market has fundamentally changed and is unlikely to return to what is now largely regarded as ‘reckless lending’.

Borrowers now need bigger deposits and good credit histories before lenders will look at them, with many first-time buyers priced out of the market until they are well into their thirties.

This analysis is backed up by the CML’s latest mortgage figures which showed a drop in the number of mortgages approved for new buyers to 51,600 in August, 8 per cent lower than the previous month, but 3 per cent higher than a year earlier.

The drop in the number of house purchase loans is more than just a seasonal drop-off. The lending market remains in ill-health and first-time buyers are bearing the brunt of lenders’ caution. The problem of excess capital that led to record lending and borrowing up to 2007 has self corrected and will not return. This means we can expect a quiet market to continue for the foreseeable future.

The Council of Mortgage Lenders (CML) has this week warned that the plans of the Financial Services Authority (FSA) to reform mortgages in the UK would force companies to restrict their lending.

The FSA has said that it aims to make lenders more careful about accepting applications for mortgages and that the new rules will protect vulnerable customers.

It seems there needs to be a balance struck, however, because the CML says that if the suggested new rules had been in place from 2005 to 2009, about half of all mortgages would not have been granted. This is despite the fact that most of them, 3.8 million in fact, have turned out to be good loans.

The FSA wants to stop the sort of excessive mortgage lending that characterised the run-up to the credit crunch in 2007 and this is undoubtedly a noble intention. However, the evidence of the CML suggests that the suggested restrictions would be far too strict and are, therefore, counterproductive.

The CML has already warned that one aspect of the FSA’s proposed system of rules, namely insisting that lenders verify the income of all borrowers, would lead to falling house prices across the UK.

Other worrying aspects of the FSA’s proposals include the methods of assessing an applicant’s income and expenditure and their ability to repay on a full capital-and-interest basis. This is in addition to automatically assuming loans are for no longer than 25 years while restricting the size of loans to people with past payment problems and assuming that interest rates might rise from their initial level.

Looking at all the new changes together the CML has concluded that 51% of all mortgages granted in the four years it examined would not have been rejected. On the other hand, it calculates that only 151,000 arrears cases and 30,000 repossessions would have been prevented.

In defence against these charges which, if true, suggest the new rules have lost all idea of balance, the FSA said that its proposals were designed to address the “major failures” that have occurred in the mortgage market and which are still affecting customers today.

So, the FSA aims to protect customers and the CML has produced figures, which given their provenance, must be taken with a pinch of salt.

The CML has in fact denied it is scaremongering, but accepted that if the FSA’s rules had been place in the past few years, many borrowers would simply have had to change their plans. They would have got a smaller mortgage, a smaller house or looked in cheaper areas.

 The FSA is currently still consulting on its new rules, which are scheduled to start early next year. The evidence so far shows that they still have some way to go to produce a finished product which both protects customers but gives them the freedom to choose the house they want.