First timers forced to pay twice as much for mortgages

Banks are offering the cheapest home loans ever, but only to those who can find a huge downpayment. Chiara Cavaglieri reports

A good-news property story isn't to be sniffed at and in recent weeks record low mortgages from HSBC and now Santander are certainly a positive step. However, this will be small comfort to anyone without a substantial deposit as the gap between the haves and the have-nots widens.

The difference in mortgage rates is now so large that those who can only rustle up a 10 per cent deposit could pay twice as much as buyers with 40 per cent saved up and the big lenders are keen to keep it this way.

"The disparity deems the Bank of England base rate to be meaningless. It literally makes no difference at all how low this rate is or the fact it has been at 0.5 per cent for more than three years," says Peter Joseph from online estate agents ithinkproperty.co.uk. "Lenders simply do not want to be in this area of the market and see it is a higher risk sector they are happy to avoid, aside from a few token expensive offerings".

Following HSBC's move a few weeks ago, Santander has matched its competitor with the cheapest ever five-year fixed-rate mortgage costing only 2.99 per cent. Both lenders have made a serious statement, but don't get too excited, there is a big catch – both loans are only available if you want to borrow no more than 60 per cent of the property's value.

With the average property price in the UK standing at around £162,000, according to the Halifax House Price index, a 40 per cent deposit equates to a colossal £64,800 – a mammoth task for any first-time buyer and homeowners who have lost equity in their home due to falling house prices.

The discrepancy is further exaggerated by lenders increasing upfront costs and making buyers jump through hoops to get the best deals. HSBC's five-year comes with a hefty £1,499 fee while Santander insists on a £1,495 application fee and only allows its existing current account or mortgage holders to benefit from the top rate. Otherwise, it offers five-year fixes at 3.49 per cent exclusively through mortgage brokers, or 3.89 per cent directly, but only for those with a 30 per cent deposit.

Another big-name lender, Barclays, has recently shaved up to 0.3 percentage points off six of its fixed-rates mortgages, including a five-year fix now reduced to 3.99 per cent with a small fee of £99, marking the lowest deal the bank has offered this year. It has also introduced a market-leading two-year fix at 3.29 per cent with no application fee. But again, both deals are reserved for customers buying a house at 70 per cent loan to value (LTV).

"Prior to the credit crunch, first-time buyers received rates which were sometimes preferable to long-time homeowners. Now those who have a good track record of mortgage repayment and high levels of equity are enjoying better rates. This is unlikely to change in the short-term," says Brian Murphy, the head of lending at Mortgage Advice Bureau.

Since the downturn there has been a clear premium to pay for buyers with modest deposits, however, this premium seems to be growing as lenders chase only those with huge deposits. The average rate for a fixed-rate mortgage at 95 per cent LTV is 5.98 per cent, according to Moneyfacts.co.uk, while 75 per cent LTV loans average at 3.62 per cent. A few calculations reveal how stark the difference can be. For someone with a 5 per cent deposit paying 5.99 per cent for a five-year fix from Leeds Building Society, compared with 2.99 per cent from HSBC, this would mean paying an extra £375 per month on a £150,000 mortgage (£374 per month for HSBC and £749 per month with Leeds).

"Over the five years of the fixed rate, you would pay an extra £22,500 for having a smaller deposit, practically double what the homeowner with the bigger downpayment would pay. It seems to make little sense that those who can least afford it have to pay the most for their mortgage," says Mark Harris, the chief executive of mortgage broker SPF Private Clients.

The Bank of England is attempting to push rates back down with the multi-billion pound Funding for Lending scheme, which makes low-cost funds available to banks and building societies to lend on to individuals. While this is potentially great news for homebuyers, there is no guarantee lenders will pass on these savings to the homebuyers who need it most. A few positive early signs include Royal Bank of Scotland cutting its five-year fix from 6.49 to 4.79 per cent for those with a 10 per cent deposit, but it remains to be seen whether other lenders will follow suit.

If, as with Santander and HSBC's deals, cheaper funding is only available at high LTVs, it will have limited impact on the wider mortgage market. So for many first-time buyers, relying on the very busy bank of mum and dad to put up a bigger deposit and secure a better rate will continue to be the only option.

"People need to start saving as soon as possible and speak to relatives to see if they are prepared to act as a guarantor or lend them the money for a deposit," says Mr Murphy.

Some lenders offer schemes to make it easier for parents to help, such as Lloyds' Lend a Hand scheme, the Family First Guarantee from National Counties building society and the Parental Assisted Mortgage Scheme from Bath building society.

Family offset loans, available through Yorkshire, Marsden and Market Harborough building societies are another option, allowing parents to use their savings to offset their child's mortgage and reduce the monthly interest payable. Similarly, Barclays' new Family Affordability Plan takes into consideration the incomes of both parent and child when calculating how much to lend, with all parties liable for payments.

Despite this, over a third of potential buyers are still forced to continue renting due to a lack of funds, according to the Royal Institution of Chartered Surveyors (Rics), and almost 20 per cent who do attempt to make the move are stymied because the banks are rationing loans.

"Many first time buyers are facing the prospect of a property ladder with no rungs. With lenders requiring such hefty deposits and affordable mortgage deals out of reach for most, a generation of potential homeowners are facing an uphill struggle," says Peter Bolton King of Rics. "Without allowing first-time buyers greater access to the second-hand property market, chains and transaction levels will continue to stagnate."

Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
News
Clarke Carlisle
sport
Sport
Chelsea manager Jose Mourinho
footballLatest score and Twitter updates
Arts and Entertainment
David Hasselhof in Peter Pan
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
PROMOTED VIDEO
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
News
newsIt was due to be auctioned off for charity
Life and Style
A still from a scene cut from The Interview showing North Korean leader Kim Jong-un's death.
tech
Environment
Sir David Attenborough
environment... as well as a plant and a spider
Voices
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'