Lenders have been accused of turning their backs on first-time buyers as they concentrate their efforts on borrowers higher up the equity chain.
A rate war that has erupted among the big high street banks and building societies has given hopes of an upturn in a moribund mortgage market.
Competition among lenders was boosted further this month by the entrance into the market of Tesco Bank.
But Tesco’s new mortgage range has one feature in common with the picture on the high street – first-time buyers are excluded.
All the new deals unveiled by Tesco are aimed at borrowers with equity or deposits of at least 20 per cent, disappointing brokers who had expected a wider selection. Its focus on those with at least 20 per cent to put down mirrors the price war that kicked off last month. Almost all the rate cuts have been on mortgages needing deposits of between 20 and 40 per cent.
There have been exceptions, with Santander and Virgin Money reducing the cost of some loans at 90 per cent loan-to-value ( LTV), but they have been rare.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “First-time buyers with modest deposits continue to pay a premium on the rate, even though they can least afford it.”
For example, the best five-year fix out there for a buyer with a 5 per cent deposit is 5.99 per cent, from Leeds Building Society. In contrast, the best deal for someone with a 40 per cent down payment is the 2.95 per cent rate from RBS. This amounts to an extra £380 a month in mortgage payments on a £150,000 mortgage for those with just 5 per cent to put down.
“Over the five years of the fixed rate, you would pay an extra £22,800 for having a smaller deposit, practically double what the homeowner with the bigger down payment would pay,” said Harris.
Such comparisons undermine hopes that the Bank of England’s Funding for Lending Scheme would feed through to cheaper loans for those making their first step onto the housing ladder.
John Boyle, head of research at Rettie & Co in Edinburgh, said: “Existing mortgage holders are seen as much less risky, especially if they have equity in their property and reliable income. Banks are still very much looking at safe returns and first-time buyers are not as well positioned because of this.”
Others are more optimistic that the funds could eventually help more first-timers on to the ladder. Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Under the scheme, lenders are incentivised to do more lending with cheaper borrowing rates available to those who do so.
“However, they will have to go up the LTV curve and lend to those with smaller deposits who are not as well catered for at the moment, offering them more competitive rates. This should be good news for first-time buyers, many of whom are struggling to pull together a significant deposit.”
So what is out there for first-time buyers at the moment?
Lloyds Banking Group recently provided some encouragement by pledging to lend £5 billion to first-time buyers by the end of the year.
The state-supported bank – owner of Halifax and Bank of Scotland – said that by the end of 2012 it would have advanced mortgages to more than 50,000 first-time buyers over the year .
It also offers one of the more successful initiatives aimed at first-time buyers, in the form of the Lend-a-Hand scheme.
This guarantor arrangement allows first-time buyers to put down a 5 per cent deposit and benefit from a 75 per cent LTV mortgage rate, provided their parent/s save at least 20 per cent of the property value with the lender.
Its variation on this is the Local-Lend-a-Hand scheme. This is where local authorities effectively play the role of parents, helping with the deposits of first-time buyers in their area.
The buyer has to pay interest on the full amount borrowed, including the local authority money, but they get a more competitive mortgage rate than otherwise available for small deposits.
Lloyds-owned Bank of Scotland offers the Head Start Home Saver, where first-time buyers are given £600 if they pay into a qualifying savings account for at least ten months in a 12-months period. The money goes into their account once they take out a first-time buyer loan with the bank.
Nationwide Building Society has a very similar deal, giving regular savers access to a mortgage requiring a down payment of just 5 per cent.
Elsewhere, Clydesdale Bank last year launched the Regular Homesaver account. This awards £1,000 cashback to customers saving monthly who take out a Clydesdale first-time buyer loan.
Several state-initiatives also aim to help first-time buyers, albeit with limited scope. The Scottish Government-backed Mi New Home deal has signed up several lenders to provide loans to first-time buyers, with the government underwriting the extra risk taken by the lenders. But the plan, originally expected to launch in June but unlikely to appear until mid-autumn, is only for new homes.
Other Scottish government-backed initiatives include shared equity and shared ownership schemes, while several housebuilders have shared equity deals on new homes.
Assistance for first-time buyers is still relatively thin on the ground, however. And with lenders under continued financing pressure amid fears over the economic outlook, the struggle for buyers without large deposits or financial assistance from their parents will go on for some time.
That’s exacerbated by the difficulty in raising deposits when interest rates are so low and consumer confidence is on the rocks.
As Boyle pointed out, many young people currently lack the job security or confidence in their income levels to take the plunge into the housing market. Even as house prices slip, therefore, there’s limited appetite for taking advantage, with many people increasingly happy to rent for the long-term. And as Boyle points out, it’s not only first-time buyers that will pay the price.
“First-time buyers are the life-blood of the housing market. Without them, it becomes difficult for everyone else to move up the housing ladder,” he said.
“The collapse in FTB numbers has been a major reason for the sharp fall in house transactions in Scotland, which are still around half of pre-recession levels.”
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