First Time Buyer Mortgage Deals on the Increase
Introduction
The housing market in the U.K. first started to show signs of decline in 2007 and in response, mortgage lenders tightened their lending criteria, so that competitive mortgage deals became more difficult to come by, especially for first time buyers. Fast forward to May 2009, and 65% of prospective first time buyers have effectively given up on owning their own home because of the high level of deposit – 40% in many cases nowadays – and excellent credit history demanded by mortgage lenders to qualify for their best mortgage deals, according to a recent survey. This is despite housing prices falling over 17% year-on-year, and record low interest rates – 0.5% from 5.0% in October 2008 – which should theoretically make mortgage deals more affordable. There is some light at the end of the tunnel for first time buyers however, with HSBC – one of the leading mortgage lenders in the U.K. – amongst others, announcing a reduction in the minimum deposit required for its best mortgage deals. In fact, one of the leading mortgage brokers in the country has recently reported that first time buyers account for 20% of mortgage applications. First time buyers do not, of course, face the problem of selling an existing property in a market where sales have fallen 40% year-on-year, according to the Royal Institute of Chartered Surveyors (RICS).
First Time Buyer Mortgage Deals
The Chancellor of the Exchequer, Alistair Darling, pledged £50 billion in the Budget to boost lending and help first time buyers to find a competitive mortgage deal. He also announced that the so-called stamp duty "holiday" for properties worth up to £175,000 would be extended until the end of 2009, instead of reverting to its previous level, at £125,000, at the end of September. In addition, recent figures released by the Halifax First Time Buyer Affordability Review revealed that the house price to earnings ratio, which is used to measure the affordability of houses for first time buyers, is at its lowest level since 2003. The average price paid by first time buyers in the first three months of 2009 was affordable to people on average earnings in 21% of local authority areas in the U.K., compared with just 6% when property prices were at their peak.
In terms of competitive deals already available to first time buyers, HSBC, as already mentioned, offers a 90% LTV ("Loan To Value") deal at a fixed rate of 4.99% for two years, and has reduced the minimum deposit required for some of its best tracker deals from 40% to 25%. Yorkshire Building Society offers a 5.49% fixed rate deal over three years, at up to 85% LTV, while Royal Bank of Scotland offers a 5.99% fixed rate deal over five years for first time buyers who can raise a deposit of at least 10%. The latest development however, is a 4.39%, three-year fixed rate mortgage deal from Lloyds TSB, which requires borrowers to raise a deposit of 5%. The so-called "Lend a Hand" deal includes the important caveat that an additional 20% of the property value must be deposited, by the parents or other relatives of the borrower, into a savings account with the bank. The savings account pays a competitive fixed rate of 3.5%, but does not become accessible until the outstanding balance on the mortgage loan falls below 90%. This effectively places a legal charge on the money deposited, but the money does legally remain in the ownership of the person making the deposit.
Interest rates may have tumbled to 0.5%, but this has not translated to mortgage rates anywhere near that low. Fixed rate deals are typically available between 4% and 5%, but the SVR ("Standard Variable Rate") of most lenders remains above 5%. Furthermore, the commitment of billions of pounds by the Treasury to its programme of so-called "quantitative easing" may put pressure on Sterling and force interest rates higher, notwithstanding the recent announcement by Charles Bean, Deputy Governor of the Bank of England, that the Bank itself may raise interest rates before selling off the Government bonds it has purchased.
It will be interesting to see what happens in September 2009, when the Financial Services Authority (FSA) is due to announce its recommendations for the mortgage market. This may include restrictions on the LTV, but also the LTI ("Loan to Income") that lenders can offer, to promote ethical lending.