Barriers lowered for those looking to step on to the property ladder

Lenders are beginning to ease their mortgage loan criteria for first-time buyers, writes Jeff Salway

MORTGAGE lenders are slowly reopening their doors to first-time buyers as the cost of loans to those with small deposits continues to fall.

First-time buyers without substantial funds or help from generous family members have been largely frozen out of the housing market over the past three years. Even where deals have been promoted to borrowers with no more than 10 per cent to put down, lenders have either rejected most applicants on the basis of credit checks or priced the loans so high as to make them unaffordable.

That is now changing, with more 90 per cent loan-to-value (LTV) mortgages on the market and lenders gradually relaxing their criteria. The cost of the average two-year fixed rate mortgage at 90 per cent LTV recently fell to its lowest level for nearly four years.

The typical 90 per cent fix over two years is now 5.39 per cent, compared with more than 6 per cent just six months ago. Louise Holmes, spokesperson for Moneyfacts.co.uk, said: “Lenders have begun to launch more competitive products to borrowers who, during the height of the credit crisis, had pretty much given up on the prospect of owning their own property.”

It’s not all good news for first-time buyers, however. While costs are coming down, they remain well above the rates charged to those with at least 25 per cent to put down as a deposit. Lenders remain picky, carrying out detailed credit checks and not hesitating to reject those that may pose even a small credit risk.

Robert Carroll, solicitor and managing director of Mov8 Real Estate, said: “While the number of mortgages available to people with a 10 per cent deposit has fallen to about a quarter of the level of early 2008, it’s not so much a problem of mortgage availability, it’s more that lenders have taken a harder approach to who they are prepared to lend money to.”

But would-be buyers can be increasingly confident that if they do stump up the deposit needed, they have a better chance now of securing a decent deal than even six months ago. And with interest rates even more likely to remain at the historical low of 0.5 per cent for the foreseeable future, experts believe competition could improve further.

Holmes said: “Borrowers would be wise, however, to take advantage of low fixed mortgage rates while they can as lenders will increase product rates once interest rates begin to rise.”

Some of the biggest high street banks have recently stepped up their efforts to attract first-time buyers. HSBC last week announced that it was making an extra £350 million available to borrowers with deposits of 15 per cent or less, while several lenders have introduced first-time buyer initiatives in recent months.

Bank of Scotland in August launched 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-month period. The money goes into their account once they take out a first-time buyer loan with the bank.

Other lenders giving buyers access to loans if they save enough include Nationwide, where the Save to Buy account gives regular savers the chance to apply for a 95 per cent LTV deal, whereas Bank of Scotland needs at least a 10 per cent downpayment.

The Lloyds TSB Lend-a-Hand mortgage works a little differently. First-timers can make a 5 per cent deposit and get the 75 per cent LTV rates, provided their parent/s save at least 20 per cent of the property value with the lender.

The Clydesdale earlier this year launched the Regular Homesaver Account, where customers saving monthly get up to £1,000 cashback when taking a Clydesdale or Yorkshire Bank first-time buyer loan. It is also one of the few banks offering a 95 per cent LTV mortgage, which last week was cut from 6.99 to 6.19 per cent, fixed over three years and with a £599 fee.

The average house price for those taking out the mortgage in the first half of this year was £97,650, according to Clydesdale, meaning buyers would need a deposit of just less than £5,000.

A buyer taking out a £100,000 loan with a 5 per cent deposit would face mortgage repayments of £655.97 a month. The bank also has a 90 per cent LTV mortgage at 5.99 per cent over three years, again with a £599 fee.

But while the low interest rate environment has helped many existing homeowners, it has become harder to save the deposits required, with cash accounts unable to keep pace with rising prices.

Carroll said: “Saving a deposit is a tall order at the moment for first-time buyers with these other pressures on their income. To save for a deposit, first-time buyers have to make sacrifices and put aside money that they could be spending on other things, sacrifices that many current home owners didn’t have to make to the same extent in recent years.”

A high proportion of first-time buyers are turning to relatives, housebuilder initiatives or government-backed shared equity schemes.

Many of Scotland’s housebuilders have in recent years sought to boost first-time buyers by offering shared equity schemes, part-exchange or direct financial assistance. Carronvale, Cruden, Bellway, Barratt, Kier and Taylor Wimpey all have shared equity deals on certain developments in Scotland, some in tandem with the Scottish Government’s low-cost initiative for first-time buyers (Lift). However, these are only suitable for some buyers and have their drawbacks.

Carroll said: “Shared equity schemes can be attractive to property purchasers who are keen to enjoy a sense of home ownership and do allow first-timers to get a foot on the property ladder.

“They are generally restricted to modern-build properties however, with builders retaining ownership of the remainder of the property.”

More recently there’s been a shift towards longer-term policies. For example, Stewart Milne has developed a range of small one and two bedroom homes aimed at the first-time buyer market. The move is predicated on the reluctance of lenders to offer high LTV mortgages on flats for first-time buyers, particularly newbuilds.

John Slater, group managing director at Stewart Milne Homes, explained: “Houses, meanwhile, fall within a different lending criterion, which offers a higher LTV up to 90 per cent.

“Therefore, we have created a range of one and two bedroom house-styles within a first-time buyer price bracket, which ensures mortgages are obtainable and deposits are much more manageable.”

Stewart Milne is also among several builders offering deferred payment plans, which help lower the deposit requirement while also reducing the LTV and, therefore, the cost of the mortgage.

Case Study: Regular saving mounts up to a decent deposit

BUYING her first home in the summer was reward for years of putting money to one side; yet it came as a surprise to Vicki Green when she discovered she’d saved enough for a mortgage.

Vicki, of Edinburgh, had been saving in easy access and Isa accounts for several years – and with particular diligence over the past four years – without aiming specifically to build up a deposit for a home.

“It was only in the back of my mind to look at buying something, I have never been desperate to get on to the housing ladder. I always hoped to be able to do it, but only if I could comfortably afford it.”

But when her financial security was boosted by a change in job circumstances, Vicki, who works in financial services, decided this year to ask her bank, Clydesdale, if she had managed to save enough to get a mortgage.

“I asked if they would offer me a loan; if they couldn’t I would happily have walked away. I only wanted to buy in the middle of Edinburgh and wasn’t desperate enough to live anywhere just to be able to buy, but they said they could offer a certain amount based on my deposit, so I knew it was possible.”

After the mortgage restrictions of the past three years, in which affordable loans requiring deposits of 10 per cent or less have been scarce, Vicki had expected to need more savings before being able to buy a home without stretching herself.

Shortly after speaking to the bank and realising that she had enough for a deposit, Vicki started looking around for potential flats.

She finally bought one near the Leith area of the capital in August, with a 5.99 per cent mortgage from Clydesdale that required a 10 per cent deposit.

“I saw horror stories about deposits so I was surprised that it wasn’t too difficult to get a mortgage with just 10 per cent to put down. I already banked with Clydesdale, which made it more straightforward, and the whole process was far easier than I had anticipated.”