Best deals for first-timers

It's tough getting on the property ladder but lenders still want to give you a hand
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The Independent Online

First-time buyers are the engine of the housing market, but rising prices have caused that engine to falter. With the average UK home now costing £160,000, according to the Halifax, first-time buyers are being forced to delay stepping onto the property ladder. According to figures released last week by the Council of Mortgage Lenders, first-time buyers made up 28 per cent of total house purchases in August. The figure has been flat for some months now, as new buyers remain wary about both high prices and rising interest rates.

First-time buyers are the engine of the housing market, but rising prices have caused that engine to falter. With the average UK home now costing £160,000, according to the Halifax, first-time buyers are being forced to delay stepping onto the property ladder. According to figures released last week by the Council of Mortgage Lenders, first-time buyers made up 28 per cent of total house purchases in August. The figure has been flat for some months now, as new buyers remain wary about both high prices and rising interest rates.

Nonetheless, mortgage lenders are anxious to persuade first-time buyers to come to them for a mortgage. Lenders will offer reduced fees, free valuations or even cash back to help them with their purchase. But in some cases, buyers pay for these incentives through higher interest rates or a less flexible mortgage.

At the same time, there is a wide range of mortgages that can suit the needs of first-time buyers well, although they are not labelled as first-time deals. Buyers who are willing to look beyond the high street will find a much wider choice of loans, at competitive rates.

Although incentives such as free valuations are helpful, first-time buyers should make sure that the mortgage's core features are good value. The most important factors to consider are the maximum loan-to-value ratio (the proportion of the property's price the bank will lend), and whether the lender charges a mortgage indemnity guarantee premium (MIG).

First-time buyers increasingly have to stretch themselves to start out on the property ladder, and that can mean taking out the maximum possible mortgage. Figures from the CML show that the average first-time buyer borrows 89 per cent of their property's value. In expensive areas, buyers may have to borrow 95 per cent or even 100 per cent of the property's value. However, a mortgage over 95 per cent of the property's value will mean that the buyer has to pay a MIG. This compensates the lender - not the seller - if they are forced to repossess the property and sell it at a loss. Typically, the MIG costs 1.5 per cent of the mortgage advance.

Halifax offers a first-time mortgage with incentives, up to 97 per cent, but this attracts a MIG of 1.5 per cent as well as an interest rate, for a five-year fixed-rate mortgage, of 5.99 per cent. Borrow 95 per cent and the rate falls to 5.75 per cent with no MIG. But according to Ray Boulger, senior technical manager at mortgage broker Charcol, Yorkshire Building Society offers a five-year fixed-rate mortgage at 5.35 per cent, substantially cheaper than many first-time deals. If a buyer can save a larger deposit, they will avoid paying a MIG and have access to better mortgage rates. "Even a 5 per cent deposit will make a difference," says Mr Boulger. A 10 per cent deposit makes a huge difference, as most lenders are MIG-free at 90 per cent loan to value."

There are several good-value 100 per cent loans on the market. These are not specifically targeted at first-time buyers but will suit many. First Active has a 100 per cent mortgage - with no MIG - at 0.21 per cent below the Bank of England's base rate for two years. Currently, this works out at 4.54 per cent. After two years, the rate rises to 0.69 per cent above base rate. Charcol also has an exclusive flexible mortgage, with a six-month discount. This currently costs 4.8 per cent, with a loan to value of 99 per cent and no MIG. There is also a free valuation on properties worth up to £300,000.

Boulger points out that 100 per cent mortgages can be as good value as those that allow borrowing between 95 per cent and 100 per cent. "Unless you can find a 5 per cent deposit, you are unlikely to get a better deal than the best 100 per cent loans," he says. "You might find it is worth borrowing the extra to pay off other debts, or to make sure you don't stretch yourself so far that you have no cash for contingencies." Borrowing 100 per cent is only an option if the buyer's income supports this. Although a wide range of lenders will now advance up to four times a borrower's salary, this might still not be enough.

Some mortgages can bridge this gap. Bank of Ireland's First Start mortgage allows a parent to have a joint mortgage with their child, without acting as a conventional guarantor. This offers increased flexibility, as a standard guarantor mortgage requires the parent to be able to cover both their own and their child's mortgage. The loan can be set up as four times the main applicant's salary and once the second, or 2.75 times joint salary. There is no MIG up to 95 per cent.

And for graduates and professionals, there are a number of specialist loans, including from Scottish Widows Bank and Standard Life Bank, which allow mortgages of up to five times salary. Aimed at graduates entering professions such as the law, accountancy or medicine, these loans are based on the idea that a professional's earnings rise steadily. But they still need to make sure they can afford the payments from day one.

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