Jeff Salway: Lenders must see they need to help first-time buyers

HOUSING market sentiment is notably downbeat after a series of reports pointing to a slowdown over the coming months.

The reasons are varied, ranging from rising unemployment to a growing excess of supply over demand, although there remains significant resistance to the notion that the market is heading for a double dip.

What is certain is that as long as first-time buyers are frozen out of the housing market, there can be no sustainable recovery. And as it stands, that will be the case for some time.

On the face of it, lenders are opening up to first-time buyers more than at any point in the past three years. Outside the big high street brands there has been a definite improvement in the availability of affordable mortgages for borrowers with relatively small deposits. Scottish Building Society is following up its Welcome mortgage with a guarantor deal for students in the coming weeks, while the Co-operative and Britannia are among several brands to have re-entered the 90 per cent loan-to-value (LTV) market.

However, the mortgage market remains dominated by a small group of big lenders - Santander, Lloyds Banking Group, RBS, HSBC, Barclays and Nationwide. And while some of them have increased the number of mortgages available in recent months, fewer than one in ten mortgages currently on the market is for borrowers with 10 per cent deposits, according to Moneyfacts. More significantly, even where 90 per cent LTV mortgages are being promoted, anecdotal evidence suggests lenders are turning down up to nine in ten of applicants for those deals. In other words, some of the UK's biggest lenders are only paying lip service by offering rates for first-time buyers.

A 10 per cent deposit is not to be sniffed at - first-time buyers in Scotland need to put down more than 15,000 for a 90 per cent LTV deal on the average home - but many lenders continue to reject even borrowers with decent credit records in addition to their deposits. They are frequently accused of moving the goalposts but it's difficult to verify rejection levels as lenders are not obliged to publish details of who they do and don't lend to.

Obliging them to reveal as least some of this information should have been attached to the post-crunch funding injections and should feature somewhere on the current government's agenda as it pushes banks to raise their lending levels. Should the government finally decide to help the mortgage market bridge the estimated 300 billion funding gap in the continued absence of wholesale market funds, it may look again at the information lenders are asked to publish.

Of course lenders have cogent reasons for opposing this, with the potential for published details to distort the kind of business they get, possibly forcing them to pull out of the first-time buyer market. And it's no secret that banks don't want to lend if they believe there's any risk of default - they are businesses and while the economic outlook remains so uncertain a degree of caution is wise.

Lenders view those with just a 10 per cent deposit as being much higher risk than those with more to put down so pricing and credit scoring are tightened accordingly. Capital-adequacy requirements mean lenders need more money set aside for high LTV mortgages, but there is a lack of consistency between lenders, with some rejecting first-time buyer business far more than others.

This isn't going change over the coming year - on the contrary, we can expect a fresh tightening of mortgage criteria as house prices drop to more realistic levels.

But it is in the interest of lenders to treat first-time buyers more fairly. For borrowers likely to have their credit records damaged by rejected applications, being kept in the dark over their prospects of acceptance with various lenders is unfair, especially where lenders have taken an application fee up-front. An alternative would be greater transparency in the criteria lenders are looking for. Similarly, they could offer pre-applications that leave just footprints on credit files, showing that credit information has been accessed but not as part of a formal credit application. This has been adopted by some credit card providers.

Without more help, it will be a while before first-time buyers return in the numbers the housing market needs for a sustainable recovery.