Aspiring first-time buyers hoping to swap landlords’ keys for a set to their own home have been hit by a fresh wave of data highlighting the struggle to buy. Yet is it all bad news for those desperate to own a home?
Last Thursday, housing charity Shelter released a report showing that it will take more than a decade to save for a deposit in some parts of the country. On the same day, Office for National Statistics figures showed that as recently as 1991 65% of 25- to 34-year-olds had bought their own home; this compares to under 45% now.
Yet despite the fact that rising house prices inevitably make it harder to afford a property, the mortgage market has improved considerably over the past 12 months – even for those with very small deposits. This might be why recent Halifax figures, based on sales of its own mortgages, showed there were more first-time buyers taking out loans in 2014 than at any time since 2007.
“As the battle for lending has intensified over the past few months rate cuts that began for customers with large deposits have moved up the range to those with deposits of only 5% or 10%,” says Andrew Montlake, a director of mortgage broker Coreco. “The good news is the trend shows no sign of abating.”
In the immediate aftermath of the credit crunch, mortgage lenders withdrew almost all of their most popular first-time-buyer products, effectively shutting out anyone who didn’t have a deposit of 20% or more. The Shelter research assumes a first-time buyer is saving for a deposit of this size.
And while loans for borrowers with smaller deposits did subsequently make a return, they were generally too expensive for most first-time buyers.
Today, however, there are mortgages available at interest rates below 3.5% even on 95% loan-to-value (LTV) products, where the borrower only has a deposit of 5% of the purchase price.
“This is partly due to a general fall in rates as a result of a fall in the cost of funds following the drop in gilt yields,” says Ray Boulger, senior technical manager at broker John Charcol. “But the improved pricing also reflects a lower spread between the best rates offered at low and high loan-to-values.”
So while all the recent headlines about mortgages have concentrated on rates as low as 1.29% for those with a 40% deposit to put down, the cost has also been dropping for those with much smaller amounts saved up.
The majority of first-time buyers will prefer the comfort of guaranteed monthly repayments that a fixed-rate mortgage provides.
The cheapest shorter term fixed-rate deals include Yorkshire Building Society’s offer of 2.94% until January 2017 for borrowers with a 10% deposit. It carries a £975 fee.
The most competitive five-year fixed rate deals are more expensive at the same loan-to-value: Clydesdale Bank, Yorkshire Bank and Coventry Building Society all offer 3.99%, with different levels of fees and incentives in each case.
Borrowers will need to keep a close eye on these rates, however, which are constantly being reassessed.
“Fixed rates have been plummeting and hardly a day goes by without another change as lenders rejig their rates and adjust their competitive position,” says David Hollingworth of broker London & Country Mortgages.
Last week Hanley Economic Building Society launched a two-year fixed rate priced at 4.49% for those with only a 5% deposit to put down. The fee is £250.
“This is highly competitive and enters the market as the lowest deal in its sector, so it is likely to prove a popular choice for borrowers with a small deposit,” says Charlotte Nelson of Moneyfacts.
Boulger says variable-rate mortgages offering a short-term discount on the lender’s standard rate are a good bet – although they don’t provide the same degree of certainty as a fix. “As it looks probable that the base rate won’t increase for at least a year, I think that at 90% and 95% LTV, these deals offer better value than fixed rates,” he says.
Boulger points to Darlington Building Society’s offer of a rate of 2.39% until March 2017 for a buyer with a 10% deposit as especially good value, particularly with a below-average arrangement fee of £574.
For a buyer with a deposit off just 5%, he likes Hinckley & Rugby Building Society’s offer of 3.49% for two years with a fee of £999.
Both these mortgages are linked to the societies’ standard variable rate so those rates could rise, making monthly payments more expensive, if the lender decided to put up its SVR.
Rachel Ferguson, 25, and David Whitton, 26, recently took advantage of falling mortgage rates. They bought their first home in Dundee in November. The two-bedroom semi-detached house cost them £84,000, which they financed with a 95% LTV mortgage from Clydesdale Bank – as well as a £4,200 deposit.
“I wanted to buy rather than rent as soon as possible, but when we first started saving, the day we’d get the keys looked a very long way off,” says Rachel, a social services administrator. “Last year we realised that first-time deals for people like us were becoming more affordable, and we were able to save enough to put down a 5% deposit.”
The Help-to-Buy alternative
Many first-time buyers will want to consider arranging a mortgage under the government’s Help to Buy scheme – and rates have been falling significantly on these loans too.
Help to Buy is available to borrowers with a deposit of at least 5% who want to buy a property up to the value of £600,000. It comes in two forms.
In the first, available only on new-build homes, buyers can borrow up to 20% of the purchase price direct from the government, with nothing to pay on the loan for the first five years; the rest of the cost of the home can be up to 75% on a mortgage with a 5% deposit.
The second type is available on both new-build and existing homes, but doesn’t come with the government loan. Instead, the government guarantees a proportion of the mortgage to the lender, enabling it to offer a higher LTV at a more competitive price than it might otherwise have felt comfortable with.
David Hollingworth, of London & Country Mortgages, says the rates on these products have come down sharply in recent weeks. “For example, Woolwich has just cut its two-year Help to Buy fixed rate from 5.19 to 4.49%, up to 95% LTV with no fee,” he says. “HSBC, Santander and Virgin are other lenders that have improved their 95% LTV deals.”