Sam Dunn: 'Can we get a better mortgage?'

Question: My boyfriend and I have a £20,000 deposit – well above the 10 per cent deposit for a £186,500 house near our current rented flat – yet we don't seem to qualify for any mortgage less than 7 per cent. I thought the Government help was meant to get the market moving. SY, Blackpool

Answer: Despite every financial lever yanked by the Government, and all the subsequent billions pouring into the banking system to try and unblock the credit markets, banks continue to thumb their nose at first-time buyers. The Council of Mortgage Lenders (CML) recently revealed that a paltry 8,900 home loans were taken out in January by those taking their first steps on to the property ladder – a record low.

Many, like you, are asking why, with a juicy deposit, is it still so hard to get a loan? At the heart of the problem lies fear: lenders are afraid that you, and hundreds of thousands of other first-timers, are currently a very bad bet in the housing market and if you want a mortgage, you're going to have to pay through the nose to get one. After all, who wants to lend to a buyer with a small slice of equity – 10 per cent, say – when the value of the asset they want to buy, a house, is still sliding? Especially when you, the borrower, may be at greater risk of losing your job in a recession.

"Lenders are anxious about falling property prices and you falling into negative equity," warns Melanie Bien of broker Savills Private Finance. "They're also worried about the amount of capital they need to offer you such higher loan-to-value (LTV) – the ratio of mortgage debt to equity – deals." The credit crunch and brutal economic reverse have put paid to dirt-cheap low-risk credit previously available to UK banks and other, specialist, lenders. What little there is is now reserved for those who represent the lowest risk, ie buyers sporting a big deposit. "The typical first-time buyer deposit in January was 24 per cent, the largest amount on record," says a spokeswoman for the CML.

This sadly puts your 10 per cent deposit in the shade. "First-time buyers are still banging their heads against a brick wall," says Andrew Montlake at broker Coreco. "Lenders are charging more for the higher risk and this is unlikely to change until house prices begin to level out. Realistically, for you, borrowing above 85 per cent LTV today, you're looking at interest rates in excess of 6 per cent but not necessarily 7 per cent," says David Hollingworth at broker London & Country. "The best way to improve the choice of lender and interest rate is to increase your deposit."

There is hope, though, says Coreco's Montlake: "All the government initiatives and promises of guarantees for banks have yet to filter through the system and entice lenders to lend more," and in the meantime, prices could carry on slipping and bring your target closer to a more affordable LTV. For now, he says that you needn't accept rates above 7 per cent. "At 90 per cent LTV, Cheltenham & Gloucester have a five-year fixed rate at 6.59 per cent, but if you can stretch to a 15 per cent deposit then things get a bit better." For example, he says, Britannia building society offers a five-year fix at 5.74 per cent. Alternatively, says Savills' Bien, edge your savings up to a 15 per cent deposit and Leeds building society has a five-year fix at 5.25 per cent with a £199 fee.

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