First-time buyers left out in cold due to lack of deposits

Published on Friday 20 November 2009 18:36

THE time may be right for first-time buyers to secure a foothold on the property ladder, but, while lending criteria are slowly easing, the chances of getting an affordable loan remain slim for those without a substantial deposit.

First-time buyer confidence has been boosted in recent weeks by an apparent lull after several months of rising house prices and signs of increased lending activity on the high street. The possibility of an end to the temporary stamp duty threshold increase, introduced in September 2008 but scheduled to end on Hogmanay, has also stimulated first-time buyer activity.

The 1 per cent stamp duty charge was suspended on properties between 125,000 and 175,000 last September as the government sought to boost the ailing mortgage market. The holiday is due to end on 31 December, although the Chancellor is coming under pressure to extend it into next year.

A fifth of Scottish first-time buyers have benefited from the temporary threshold increase, according to Bank of Scotland, saving up to 1,750. It estimated that just 7 per cent of first-timers in Scotland have paid stamp duty since September 2008, when the threshold was raised to 175,000, compared with just over a quarter that would have paid it under the permanent 125,000 level.

The stamp duty holiday, in tandem with lower house prices, is credited with boosting first-time buyer numbers over the last year. The latest data from the Council of Mortgage Lenders (CML) shows that of the 56,000 house purchase loans given in September, 19,700 were to first-time buyers, 5 per cent up on the previous month and 45 per cent more than in September last year.

But the CML also revealed that the average first-time buyer needed a deposit of 25 per cent. And research out this week from realpricecomparison.com revealed that first-time buyers without that 25 per cent deposit are paying up to 50 per cent more in monthly payments.

The average best-buy mortgage at 75 per cent loan-to-value (LTV) is currently 3.14 per cent, with deals of between 2.94 and 3.49 per cent available from lenders including Woolwich, HSBC, the Post Office and Northern Rock. In contrast, the average best-buy mortgage for borrowers with just a 10 per cent deposit is 7.01 per cent, according to the comparison site. Francis Ghiloni, commercial director at realpricecomparison.com, said the rise in first-time buyers would be short-lived if those without deposits of at least 25 per cent remain excluded.

"The issues holding the market back are worries about further house price falls and pressure on lenders from regulators to hold more capital in reserve for higher LTVs. Until these issues are tackled first-time buyers will continue to struggle," said Ghiloni.

However, the lending outlook is gradually improving, claimed Katie Tucker, technical manager at Mortgageforce Scotland, who said that, with prices traditionally dropping over the winter, it could be an ideal opportunity for first-time buyers to buy low.

"Many lenders have lending targets to meet and may relax their criteria or deposits required to fill their quota at this time of the year," said Tucker "Alliance & Leicester, Bank of Scotland and others are offering free valuations on many of their homebuyer products as an extra incentive.

"There are several 90 per cent mortgages at around 7 per cent, but we are now seeing several lenders offering mortgages to buyers with a 15 per cent deposit at far more affordable rates, under 5.99 per cent for a fixed or a tracker rate."

David Rolleston, mortgage broker at Mortgage Advice Brokerage in Glasgow, said sellers may also be more flexible at this time of year. "Over winter the market normally slows, so sellers that have been on the market for a while might be more prepared to sell before winter than wait until March."

There is a flipside to the argument that buyers should buy now, Rolleston added. "I don't think prices in Scotland will fall back, but we won't see any big increases for some time. So that is incentive for first-time buyers to save more money over the coming months in the confidence that prices will still represent a good opportunity next year."

Case study: 'Stamp duty holiday made big difference'

LOWER house prices and the temporary stamp duty holiday were enough to convince Kevin Downie to get on the property ladder as summer drew to a close.

Kevin, 27, from Edinburgh, bought his first home in August after saving enough money for a 10 per cent deposit on a 140,000 property in the Blackhall area of the capital.

"That was when I had enough money, after taking a few years to get a deposit together," said Kevin, an electrical field technician.

After a year of falling prices, there was a suggestion in late summer that prices were stabilising and ready to bounce back, giving Kevin the sense that the time was right to jump on to the property ladder.

"The lower house prices made it a good opportunity," he said. "If I'd have waited for another year, you never know what would have happened."

Kevin secured a 6.79 per cent mortgage with Bank of Scotland at a loan-to-value of 90 per cent. However, the deal included 500 cashback and conveyancing fees were waived.

"That makes a difference and not paying stamp duty made an even bigger difference again," said Kevin.

Under the normal stamp-duty threshold of 125,000, Kevin would have faced a charge of 1 per cent, but the temporary increase in the threshold last September – likely to end on 31 December – saved him 1,400.

"It would have taken an extra few months to get that together, so it really helped," he said. "One per cent does not sound like much, but for a lot of people it is."