95% Mortgage Back
Five years ago there were more than 800 different 95% mortgages available to first time buyers. When the financial crisis struck, they disappeared from lenders’ shelves almost overnight. But the first few weeks of 2012 are seeing a surprise turnaround – the number of loans on offer has tripled and interest rates have fallen.
Will “generation rent”, until now forced into renting because they can’t stump up the huge deposits demanded by lenders, finally be able to put a foot on the property ladder?
This week Leeds Building Society launched a mortgage that requires a deposit of only 5% and comes with an interest rate of 5.25% (although there’s also a hefty £999 in fees). Last week both Newcastle and Ipswich Building Societies launched 95% deals, while broker John Charcol says it will unveil a low-deposit scheme for first-time buyers in early February.
It follows the launch of Nationwide’s save to buy scheme in which savers who put money aside for at least six months can apply for a 95% loan, and Lloyds lend a hand scheme, where first-time buyers can access a 95% deal if they can convince their parents to put their savings up as security against the mortgage.
Buyers able to stump up a larger 10% deposit can enjoy interest rates as low as 3.84% from HSBC – which brings the cost of a mortgage significantly below the average that buyers were able to find during the boom.
Fed up with extraordinary rent rises – mundane flats in London are averaging more than £1,000 a month – and now able to find mortgages with low deposits, first-time buyers are beginning to return to the market in volume.
Rent increases mean buying is now on average 16% cheaper than renting, according to research issued by Halifax today. That represents a remarkable turnaround from 2008, when the cost of buying was typically 29% more expensive than renting.
L&G Mortgage Club, which acts for thousands of estate agents and last year sourced 12% of all UK mortgages, says that so far this year it has witnessed a surge in applications from first-time buyers, particularly in London, Surrey, Sussex, Edinburgh and Glasgow.
“A lot of people were priced out of the market between 2003 and 2007, then, when the credit crunch came along, prices became more affordable, but they could no longer get a mortgage because of the deposits required. There’s huge pent-up demand out there from potential first-time buyers,” says Ben Thompson, managing director of L&G Mortgage Club.
This time last year, first-time buyers made up just one quarter of applicants for loans, but the figure is now nearly one third, L&G says.
But let’s not get too carried away with a market revival. Half of all first-time buyer applicants are rejected when applying for a 95% deal. Only those with squeaky clean credit records get through. The new deals are mostly from small building societies with limited funds. Big banks are still hamstrung by capital adequacy problems, and don’t like lending to first-time buyers as 95% deals force them to set aside more capital.
The ongoing eurozone crisis, rising unemployment and forecasts of further house price falls are also encouraging many buyers to sit tight.
Britain’s property market is still characterised by a “can’t buy, won’t sell” generational divide, according to HSBC’s annual Moving Home Survey, published yesterday.
When it asked people under 34 why they are not buying, 29% cited high deposits, 15% the general problem of finding a mortgage, and 14% worries about unemployment. One tenth said they no longer had any wish to buy a home.
A modest pick-up in mortgage approvals during December is unlikely to be sustained. The Council Of Mortgage Lenders said this week total lending in 2011 was £140bn – a small rise on 2010 but still substantially below traditional levels and way below the record £363bn in 2007.
Howard Archer, economist at IHS Global Insight, forecasts a 5% house price fall in the UK this year. “We suspect that low wage growth, a markedly weakening labour market and major concerns over the economic outlook will limit potential buyers and weigh down on house prices.”
But many first-timers will be spurred into buying by the looming end of the stamp duty holiday. Since March 2010, first-time buyers have enjoyed exemption from the 1% duty on properties between £125,000 and £250,000, but this ends on 24 March.
The government hopes taxpayer-backed 95% mortgages for new-build properties, scheduled to launch in April under the FirstBuy banner, will help maintain momentum in the market. Interest rates on the loans, which will be offered in partnership with developers such as Barratt, are still being negotiated but are expected to come in at around 4.25%. Potential buyers can register now, but the first homes are unlikely to be available until September.
