Double whammy for first-timers as prices stabilise and loans dry up

Published on Friday 2 October 2009 21:03

FIRST-TIME buyers hoping for lending conditions to improve so they can take advantage of subdued house prices have been warned they face a long wait.

A lack of supply in the housing market has caused house prices to stabilise, frustrating would-be buyers waiting for further falls to ease their path on to the housing ladder. At the same time, the nascent housing market recovery has failed to produce a significant increase in the number of affordable loans for those with deposits of less than 20 per cent.

More than 800 90 per cent loan-to-value mortgages have disappeared from the market in the past two years, with lenders instead focusing on less risky buyers with more than 25 per cent deposits to put down. Now just six lenders offer 95 per cent LTV mortgages and 30 offer 90 per cent LTV deals.

And those low-deposit loans that are available don't come cheap. The average two-year fixed-rate mortgage for borrowers with just 10 per cent to put down is a mere 0.12 per cent cheaper, at 6.12 per cent, than it was in September 2007, despite a 4.35 per cent fall since then in the swap rates that determine the cost of funding for lenders, according to Moneyfacts. This week HSBC revealed it was making an extra 500 million available to fund 90 per cent mortgages, raising hopes of a return to competition at high LTV levels. But lenders continue to cherrypick lower-risk borrowers at the expense of the typical first-time buyer, claimed Michelle Slade of Moneyfacts.

"Lenders are concentrating on rebuilding their balance sheets rather than helping people get onto the ladder," she said.

Lenders are only willing to offer competitive deals for borrowers with deposits of 25 per cent or more, said Slade. "Anything smaller than this and borrowers will pay a hefty price."

And that is unlikely to change any time soon, cautioned Ray Boulger, senior technical manager at mortgage broker John Charcol. Under the Basel II rules implemented in January 2008, the higher the loan to property value, the bigger the capital cushion lenders have to set aside, with 90 per cent loans requiring up to ten times the safety net needed for 60 per cent deals.

"There are understandable expectations that when lenders are happy that the market is rising again they will be more generous with small deposit loans, but that won't happen," said Boulger. "Until lenders have plenty of funds to lend, first-time buyers are going to struggle."

One hope that would-be buyers do have is increased innovation from lenders, Boulger added. "The systemic high LTV problem is not going away so it will be in the interest of lenders to develop first-time buyer schemes."

He cited the lend-a-hand mortgage from Lloyds TSB, under which buyers can get a loan of up to 95 per cent LTV, provided their parents, other relatives or friends set a further 20 per cent of the property's value against the loan.

Other lenders are considering similar initiatives, although no launches are expected imminently.

Unsurprisingly, as Boulger noted, first-time buyers increasingly rely on generous relatives. "The market is going to be even more split between those with family help and those who haven't got that," he said.

So in the meantime, what do buyers do if they are not fortunate enough to have family help on hand? There are some low LTV deals around, albeit not at the rates available on higher deposit mortgages.

Clydesdale and Yorkshire banks have had a 95 per cent LTV deal available for most of this year and have seen a significant increase in applications from first-time buyers since January.

The Scottish Building Society has also continued to offer a 90 per cent mortgage, with loans to first-time buyers now accounting for 27 per cent of new mortgage business, up from 5 per cent in the previous financial year. However, its average LTV is 79 per cent, compared to the 89 per cent average at both Clydesdale and Yorkshire, with an average deposit of 26,000.

Gerry Kay, chief executive of the Scottish Building Society, commented: "We offer excellent mortgage products but do stick to strict criteria to ensure affordability."

Other schemes for would-be buyers include the Scottish Government's open-market shared equity scheme. The 60m scheme was launched in April to give first-time buyers 20 to 30 per cent of the value of a new home on a shared ownership basis. Under the scheme, buyers typically cover 60 to 80 per cent of the property and the government funds the remainder through an interest-free equity stake. Buyers pay the government a proportion of the proceeds when they sell, or earlier.

More than 600 buyers have taken advantage so far, but it is understood that the current fund has been fully allocated.

As house prices apparently stabilise, however, the onus will increasingly be on saving for the bigger deposit needed to benefit from the better mortgage rates.

"It's about getting the right product and enough of a deposit to get on to the ladder," said Gary Lumby, head of retail banking at Yorkshire Bank. "People are using the bank of Mum and Dad, but they have also started to save as lower prices have made it easier to save the required deposit."