Doors open for new buyers. But will they like what's inside?
First-timers can dodge a big deposit, but only if they open another account with their lender. By Esther Shaw
Sunday 01 June 2008
With so much turmoil in the mortgage market, finding a good deal has become increasingly hard for borrowers – and especially tough for those who can raise only a small deposit.
A growing band of lenders, keen not to miss a trick, are cashing in on this. They are trying to attract borrowers with the assurance that it isn't necessary to have substantial savings put by.
But this offer comes with strings attached – the proviso that the borrower must take out another account with the same provider. In this way, the customer is tied in and helps to boost the lender's own cash deposits at a time when the banks are trying to reduce their reliance on the money markets to fund new loans.
NatWest is one of the latest to jump on this bandwagon, with the launch of a savings account billed as a "way to help borrowers get on the property ladder". The First Home Saver offers an "attractive haven" to help people build a deposit for their first home, and a "generous tax-free cashback of up to £5,000" on completion of a NatWest mortgage.
While this may sound appealing, brokers are urging caution. "With lenders reducing the maximum loan-to-value [LTV] they are prepared to advance, first-time buyers who can't rely on their parents for financial help will have to go back to old-fashioned values and save for a deposit," says Melanie Bien at Savills Private Finance. "But while it may seem sensible to open a savings account at the same provider with which you plan to take out your mortgage, there is no real advantage to doing so."
With NatWest's rates ranging between just 1.9 and 3.1 per cent, savers could easily do better by going elsewhere and choosing from the whole of the market for their mortgage. Icesave, for example, is offering 6.1 per cent on its tax-free easy access individual savings account (ISA), while Kaupthing Edge is paying 6.31 per cent a year on its savings account.
That said, the big selling point of the NatWest deal is the £5,000 cashback. But Ms Bien points out that to get this in full, savers will need to have £50,000 in their account for up to six months before applying for the mortgage. "This is a significant sum and will be beyond the means of many first-time buyers."
Realistically, adds Louise Cuming from the price-comparison service Moneysupermarket.com, first-timers will only manage to squirrel away between £10,000 and £25,000. "The cashback for saving this amount drops to just £1,250, and this could easily be negated by a less-than-competitive mortgage rate," she says. "While this deal is 'win-win' for NatWest, which benefits from both the savings and mortgage products you hold, it is not the same story for borrowers."
The Halifax, meanwhile, is offering an LTV of 97 per cent to those borrowers who open an account with the bank and agree to have their salary paid in every month. This applies to any current or savings account taken out with the Halifax and compares to the normal maximum LTV of 90 per cent for a first-time buyer.
"The Halifax is taking a slightly different approach but the principle works in the same way," says Ms Cuming. "The Halifax is also in a win-win position, not only benefiting from the salary credits but from the financial insight it gets into the customer, which will mean it can cherry-pick applicants. It's worth noting that the 97 per cent mortgage is not an automatic right of having a salary account with the Halifax – simply a gateway for consideration."
Ms Bien adds that the Halifax deal may be worth considering if you need a higher LTV. "But it is important not to over-stretch yourself," she warns. "This is particularly important as house prices are falling in some areas, which means you could be at risk of ending up in negative equity."
While the latest moves by the banks are a result of the current economic malaise, the idea of tying customers into another product alongside a mortgage is not new. HSBC and Alliance & Leicester have been offering preferential rates to customers who hold their current accounts for some time.
With HSBC, customers who pay a monthly fee of £12.95 for its packaged Plus account qualify for a rate of 5.88 per cent on its two-year fixed-rate home loan, says David Hollingworth at broker London & Country. This compares to HSBC's standard 5.98 per cent rate.
"We've long seen banks trying to get consumers to buy other products, such as life insurance, direct from them, without scouring the whole market or taking advice," says Mr Hollingworth. "The difference now is that some lenders are making this compulsory if you want to take out a mortgage."
He warns consumers to think carefully before putting all their eggs in one basket. "You could find that what you gain on the one hand, you lose on the other," Mr Hollingworth explains. "You need to look at the other products you are being tied into, as these are unlikely to be as good value as you could get by comparing the whole market. This whole concept is as far removed as it can be from encouraging consumers to shop around."
Ms Cuming agrees that the mortgage landscape is changing – prompting lenders to seize the opportunity to demand loyalty in other products. "The concern is that this could mean consumers don't look beyond the shiny wrapping. The devil is always in the detail, so make sure you do your sums."
'I moved my accounts and got an improved
rate of 4.99 per cent'
Steve Lamb, 46, from Crowborough, East Sussex, has just moved both his savings and current accounts to First Direct to benefit from preferential rates on a mortgage with the same provider.
Earlier this year, with his current deal coming to an end, he began shopping around for a new mortgage.
"I had previously had a two-year fix with Chelsea building society at 4.84 per cent, but I knew I wouldn't be able to get as low a rate this time.
"After researching the market, though, I decided to move my current and savings accounts to get a rate of 4.99 per cent on First Direct's five-year fixed-rate mortgage. This is an offset deal and is quite a bit lower than First Direct's standard fix."
Steve adds that he read the small print carefully before making the move: "You have to ensure you know what you're getting into."
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