Mortgage lenders start to say yes again to first-time home buyers

Affordability has improved to become almost twice as good as it was three years ago
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The Independent Online

things are looking up for anyone hoping to take their first steps on the housing ladder. Despite most potential first-time buyers believing they can't afford to snap up their dream home, evidence from the Halifax published this week suggests that mortgage costs as a proportion of monthly income have shrunk dramatically.

The lender claims that monthly mortgage payments as a percentage of income are nearly half that of the level of 2007. Affordability for first-time buyers reached its worst point in June 2007 when half of a typical new homeowner's disposable income was being swallowed up by mortgage payments. The proportion has now dropped to a much-more manageable 28 per cent.

The reason for the change is because house prices have fallen while interest rates have been stuck at historically low levels for more than 18 months. First-time buyers have also been helped by the last Labour government's changes to stamp duty, raising the threshold to £250,000. It means that 94 per cent of first-time property purchases are now exempt from the tax, which adds 1 per cent to the cost of a home at its lowest level.

But perhaps the biggest barrier to people buying their first home has been lenders' reluctance to hand out mortgages in the last couple of years. Even that is improving, according to Stephen Noakes, the commercial director for mortgages at the Halifax. "Despite perceptions, eight out of 10 first-time buyer mortgages are approved," he says.

However, that doesn't take account of the number of people put off applying for a loan by the fact that, unless they can raise a huge deposit, they're not going to be granted any of the best deals. In the last few months, for instance, the tastiest fixed rates or discounts have only been available to people who can stump up a deposit of at least 25 per cent with the very best deals saved for those with a massive 40 per cent deposit.

But there is some evidence that lenders' meanness is beginning to ease, says Andrew Hagger of "The competition which has driven rates lower in the mainstream mortgage market has started to filter through to first-time buyer deals and even though many of the better rates are reserved for those with at least a 25 per cent stake to put down, we are seeing more choice and some lower pricing at 90 per cent loan to value," he says.

His view is backed up by Melanie Bien, director of mortgage broker Private Finance. "There is more choice of product for those with a 10 per cent deposit than there was a year ago," she reports. However, she warns that borrowers will still have to pay a premium on the rate. "The other problem with high loan to value deals is that the credit scoring is much tougher than for those with a bigger deposit, so many applicants who have had no credit problems in the past, find that they are rejected."

Being rejected for a loan will make it harder to get one elsewhere as the rejection will end up on your credit record, so potential borrowers need to be wary of applying if they believe they may get turned down.

For those who are struggling to raise even a 10 per cent deposit, there are options. "If you can call on the Bank of Mum and Dad for help, the situation is undoubtedly easier," points out Melanie Bien. "Ideally, they will be able to help with the deposit or act as guarantors, which will enable you to take on a bigger loan."

Under Lloyds TSB's Lend a Hand scheme, for instance, the bank will lend up to 95 per cent of the value of the property as long as 25 per cent of the purchase price is provided by the buyer and their parents or family member, with the buyer contributing a minimum of 5 per cent of this.

"Because the bank is in effect only advancing 75 per cent of the value of the property by taking a legal charge over the parent's contribution, their risk is far lower than with a traditional 90 per cent advance and this is reflected in less punitive interest rate," explains Andrew Hagger.

Another option for those struggling to raise cash for a deposit is to think about newly-built homes, where the deposit required is often effectively just 5 per cent. Under house builder Barratts' purchasing schemes, for example, it lends up to 15 per cent of the value of a property in the form of an equity share loan.

The builder says that as well as reducing the amount required upfront, its purchasing schemes can help reduce monthly mortgage repayments because first-time buyers can apply for a lower loan-to-value deal and get better mortgage rates. The company also offers a five year guarantee on fixtures and fittings. "It means that home buyers won't be faced with any hefty maintenance bills – ideal for first-time buyers on a tighter budget," says Gary Ennis, managing director for Barratt Southern Region.

Meanwhile, to help make the home buying process easier, Nationwide has launched a free First Time Buyers' Guide. "We wanted to help first-time buyers by giving them an overview of what they need to know in every day language and to make it available all in one place," says Caroline Hallatt, Nationwide's head of corporate responsibility.

"The guide is fully independent of our products and is designed to help anyone considering buying or renting their first home." Their guide is available free at the Nationwide's website:

'It wasn't much of a problem getting a mortgage'

First-time buyer Simon Acton, 26

Living at home with his parents has allowed Simon Acton to save up enough to put down a 10 per cent deposit on a £97,000 three-bedroomed semi in his home town of Warrington in the North-west. The science teacher plumped for a five-year fixed-rate deal with the Nationwide at 5.9 per cent.

"I spent a long time looking at different options but decided to go for a fixed rate as it means I can budget properly as I know what my monthly mortgage repayments are going to be," he says. "I thought it might be a bit of a problem getting a mortgage but the building society was very helpful and the charge for arranging the loan was just £398, which I expected to be a lot more."

He says his parents didn't charge him for rent, which allowed him to build up reasonable savings, and he also looked at several different deals from lenders. "But staff at the Nationwide took the most trouble explaining my options and the costs of taking out a loan. I was also keen to make sure there were no hidden costs or expensive surprises, other than the arrangement fee," he says.

After looking for some weeks, Simon bought a repossessed property which he had been watching. "I looked at quite a few houses and when I first saw this one it was on the market for £110,000. But over time I noticed it had started to drop in price so I kept a close eye on it. When it reached £100,000 I started making offers and eventually we settled at £97,000," he says. "The property does need a little cosmetic work and some redecoration but I reckon I've got a bargain as a similar house up the road went for £120,000."

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