Mortgage providers are under growing pressure to cut costs for first-time buyers as they reap the rewards of a Bank of England scheme making it cheaper for them to lend.
Fixed rate mortgage costs have hit new lows in recent weeks as borrowers begin to feel the benefit of the Treasury’s £80 billion funding for lending scheme, launched in August.
But only a select group of borrowers is benefiting from the stimulus package, operated by the Bank of England and aimed at boosting lending. For while competition among the biggest lenders is keen, they continue to target only those with deposits or equity of at least 40 per cent of the property value.
There are few signs of loans becoming more affordable for first-time buyers – and unless more first-timers enter the housing market, experts warn, there’s no chance of it emerging from the ongoing slump.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Lenders have been falling over themselves to offer increasingly good rates to those with sizeable deposits or similar levels of equity in their homes.”
He pointed out that a borrower with a 40 per cent deposit can get a four-year mortgage for just 2.94 per cent, courtesy of Chelsea Building Society. In contrast, the best four-year deal for someone with just 5 per cent to deposit is more than twice as expensive, at 5.99 per cent (courtesy of Newcastle Building Society). “It makes little sense that those who can least afford it are paying such a premium,” said Harris.
There was one beacon of hope for first-time buyers this week, however. The Co-operative Bank launched a two-year fixed rate mortgage of 3.99 per cent - and with no arrangement fee - for those with just a 10 per cent deposit. The lender said it was the first to pass on the benefits of the funding for lending scheme to first-time buyers. The product is the cheapest fixed rate deal available for first-time buyers.
James Hillon, head of mortgages at Co-operative Bank, said: “We welcome the funding for lending scheme as a route to boosting the housing market and the wider economy, but believe this goal will only be achieved by increasing the availability of mortgages to first-time buyers rather than just focusing on remortgage customers.”
Since the start of the credit crunch five years ago, lenders have steered clear of borrowers they see as even slightly risky, resulting in a dramatic contraction of lending to first-time buyers. As the table on this page shows, the average cost of mortgages for borrowers with large deposits has come down far more than the average for those with smaller deposits. The typical two-year deal for those with 10 per cent to put down has dropped from 6.39 to 5.31 per cent since 2007, even though the Bank interest rate has plunged to a record low of 0.5 per cent in that time.
The cost of the average 60 per cent LTV deal has fallen from 7.04 to 4 per cent over the same period, according to Moneyfacts.
The challenge facing first-time buyers is underlined by new research from Clydesdale Bank. It found that almost half of first-time buyers in Scotland need help from family and/or friends in saving a deposit for a mortgage.
Almost four in ten first-time buyers north of the Border have needed a gift or a loan from their family and 9 per cent have used inheritance money.
Of the Scots first-timers to have been helped onto the housing ladder, three in ten were helped with up to 20 per cent of their deposit, while 48 per cent were given up to 10 per cent.
Those still saving for a deposit expect to be waiting a while longer before securing their first home. Almost three in 10 would-be buyers in Scotland think they will need to save for up to three more years, while more than a fifth reckon it will take up to five years or more.
The Clydesdale is one of the few lenders to have kept mortgages available for those with deposits of just 5 per cent. Its 95 per cent LTV deal is a three-year fix with a rate of 6.29 per cent. For those with 10 per cent deposits the three-year cost falls to 5.69 per cent.
Several banks, including the Co-op, have guarantor-type arrangements, where the buyers must supply a repayment guarantee from a parent or guardian.
Lloyds Banking Group’s lend-a-hand scheme allows borrowers to put down a deposit of 5 per cent and get a 75 per cent LTV mortgage rate, on the condition that their parent/s deposit at least a fifth of the property value in a savings account with the lender.
Bank of Scotland’s “head start home saver” rewards first-time buyers with £600 cashback 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 loan with the bank.
State-backed initiatives include MI New Home, a mortgage indemnity scheme that aims to get banks lending to those with deposits of just 5 per cent by providing a Scottish government guarantee to underwrite potential losses on that lending.
Yet the best mortgage deals remain far from the clutches of first-time buyers. There was some expectation that Tesco Bank’s recent entry into the market would improve matters, but it is also concentrating on offering low cost mortgages to those with deposits or equity of at least 40 per cent.
There is some hope, however, that more lenders will follow the Co-op in passing the benefits of the funding for lending scheme on to first-time buyers.
“As more lenders take advantage of these cheap borrowing rates, we expect to see more competitive rates for those wanting 85, 90 or even 95 per cent LTVs. These will be essential if the housing market is to get the kick-start it so desperately needs,” said Harris.
Mortgage Rates 2007 Today
Average two-year fixed (95%) 6.43% 5.86%
Average two-year fixed (90%) 6.39% 5.31%
Average two-year fixed (75%) 6.51% 4.09%
Average two-year fixed (60%) 7.04% 4.00%