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Things can only get better
5:13pm Thursday 6th August 2009
The positive news releases just keep on coming. This week sees Nationwide’s house price index recording an increase in average UK prices for three months in a row. In July they increased by 1.3 per cent to £158,871 – the fastest rate since February 2007. Far be it for me to put the dampeners on this particular ray of sunshine but, as many commentators have already noted, the grave lack of supply, particularly in prime locations, is keeping prices up. Of course buyer interest is increasing, and has been for months now, but there is a big difference between a wannabe first-time buyer (FTB), and one who can realistically get the requisite mortgage finance and deposit together. You have limited choices if you want to buy your first home:
- Save a significant deposit of 25 per cent of the property’s value. In many parts of the UK this could take years.
- Get help to raise a 25 per cent deposit from your parents or another source. If you can do this you are one of the lucky ones – and in the vast minority of potential FTBs.
- Save a 10 per cent deposit and pay a hefty mortgage rate. This still requires a fair bit of saving, and your monthly outgoings will be higher in order to service the mortgage. If you don’t earn a high salary you might find that the amount lenders are willing to offer leaves you with limited buying options.
In other words, many first-time buyers are still effectively frozen out of the mortgage market. And while deals may be getting competitive for those with 25 per cent or more upfront, lenders are still unable to offer such attractive deals to higher risk borrowers. This is the case for a few reasons:
- When lenders price for risk they have to charge a premium to those putting down a small percentage of the property’s value. After all, with house prices far from stable these borrowers could be more likely to fall into negative equity than any other group. Lenders need to account for the fact that the asset secured against the mortgage (the property) could fall in value.
- The regulator’s rules about how much capital mortgage lenders need to set aside when they lend out mortgage funds are more onerous at higher loan-to value (LTV) ratios (ie on deals with smaller deposits). In other words, lenders have to tie up more money to lend these riskier mortgages. With funds pretty scarce that’s not something they are overly keen on doing.
- Lenders have limited funds. The few that are currently open for business are already extremely busy and, frankly, many wouldn’t be able to manage the volumes if they launched market-leading high LTV mortgages. They can currently get the business levels they require with lower-risk offerings.
HOPE SPRINGS ETERNAL
There is constantly speculation about lenders making more mortgages available to borrowers – particularly first-time buyers – and talk of the Government pressure they are under to kick-start lending to those at the bottom of the ladder. But is anything actually changing? Back at the beginning of May there was excitement that a few lenders had launched higher LTV deals, and optimism that the mortgage market was returning to something like normality (ie not 2007 lending figures). Some lenders made their best deals available to borrowers with 25 per cent upfront instead of 40 per cent – not exactly high LTV lending but a step in the right direction. Woolwich made large cuts to its higher LTV mortgages, and then HSBC launched a range of low 90 per cent LTV mortgages causing a ripple of excitement. But the devil was in the detail and the mortgages were only available to the bank’s Premier and Plus current account customers. Still, the freeze was starting to thaw, wasn’t it? Not really. Very little has since changed in the 90 per cent LTV bracket. It’s still expensive for those with just a 10 per cent deposit who are limited to fixed rate deals and a handful of variable options.
RAY OF SUNSHINE
But there are some positive signs on the horizon. At the start of this month, the Bank of England’s Credit Conditions Survey said that lenders expect an increase in the availability of secured credit (mortgages and secured loans) to households in the next three months. Plus they expect a general easing in ’non-price terms’ – in other words criteria could become more flexible. The report specifically noted that lenders believe there will be an increase in maximum LTVs. So there could be more mortgages for those with smaller deposits. Hurray. But if you can’t wait for these lender expectations to come to fruition, because you need a high LTV mortgage now, below are your best bets. I’ve listed a range of deals with different fees and durations for those with a 15 per cent deposit and for borrowers with just 10 per cent.
First published in Mortgages and online at www.lovemoney.com