Forty years ago, families saved and borrowed money from the same bank, sharing a manager who knew them by name. Now people are calling for a return to the old banking model where banks lend money only against deposits it has already taken in.
With a nod to this tradition, Nationwide launched a new Save to Buy mortgage incentive last week for first-time buyers who save with the building society.
"It used to be fairly common practice to have a 'bank for life', but people in this generation are more likely to switch banks when they are offered a better deal or experience bad service," says Martin Bamford of independent financial adviser (IFA) Informed Choices.
Britain's biggest building society is offering new buyers the chance to get attractive mortgage rates, previously available to existing customers, with a mere 5 per cent deposit. The proviso is that they must save at least £50 a month with Nationwide for between six months and three years.
"Sticking with a bank or building society for longer periods gives them a better opportunity to understand your personal finances, including your ability to stay out of debt," says Mr Bamford. "Banks should be rewarding customers for loyalty; offering preferential borrowing and savings rates for long-standing customers would be a good way to do this."
Nationwide currently offers a 95 per cent loan fixed for three years at 6.29 per cent and a five-year fix at 6.89 per cent, both with a £999 fee, although as a Save to Buy customer you would also qualify for the current Nationwide offer of a £500 discount on fees for first-time buyers.
On the savings side, you earn 2.5 per cent before tax, although with the average first-time-buyer home at £136,740, a 5 per cent deposit target of £6,837 means that putting only the minimum £50 away each month would barely scratch the surface. As a bonus, however, if you manage to save more than £2,500 for your subsequent Nationwide deposit, you're rewarded with £250 cashback. If you save more than £5,000 you earn £500, and the maximum £1,000 is available if you save more than £10,000.
"We've tried to make it as flexible as possible. Although the account must be funded with a minimum of £50 per month, customers can miss up to three months' payments within each 12-month period; if they get an extra cash boost, they can make a lump sum payment and build that into the account as well," says Martyn Dyson, Nationwide's head of mortgages.
Nationwide is not alone in offering new buyers incentives at higher loan-to-value (LTV) rates. Other lenders are prepared to offer mortgages to new buyers with a 5 per cent deposit, but most are more complicated, involving family members either acting as guarantors, as with the National Counties Family First Guarantor mortgage, or stumping up their own savings as security, as with the Lloyds Lend a Hand scheme.
There are, however, a few other building societies with more straightforward deals to rival Nationwide's Save to Buy. The First Home Saver from Nottingham, for example, offers 95 per cent LTV mortgages and a return on savings of up to 3.25 per cent plus up to £250 cashback if you then take out a mortgage with it.
With the Yorkshire/Clydesdale Regular Home Saver, you must make ongoing monthly deposits of £200 with a return that tracks the Bank of England base rate. You are then rewarded with up to £1,000 cashback if you manage to save a 10 per cent deposit or £500 if you reach 5 per cent.
Targeted accounts such as these are a good way to encourage disciplined saving. However, the underlying products still have to stand up to scrutiny. The best standalone regular saver is currently Santander fixed-rate Monthly Saver (Issue 12) which pays 4 per cent for 13 months on monthly deposits of between £20 and £250. If you open a Santander current account at the same time the rate is boosted to 6 per cent, which easily overshadows the paltry 0.5 per cent return with the Yorkshire/Clydesdale deal. Beyond regular savers, you can earn tax-free returns of 3.35 per cent with the AA's Internet Access ISA, although this include a 1.65 per cent bonus for a year.
Also, there is no way to know whether the special rates that you're saving for with Nationwide, or any other lender, will be the best deal on offer when you manage build up a big enough pot. Right now, for example, Nationwide's 95 per cent LTV rate of 6.29 per cent for a three-year fix can be beaten by Skipton's new two-year deal at the same LTV costing only 5.99 per cent, with the bonus that it has no completion fee and an application fee of £195. If better rates on savings and mortgages are available elsewhere, is there any point? And there is no guarantee of being accepted for one of these mortgage deals.
"Anything to try to help first-time buyers is welcome, but the reality is that only a small percentage of people applying for any 95 per cent mortgage are going to be accepted," says Simon Cox, the financial services director at Your-move.co.uk.
The latest statistics from the FSA show that lending at over 90 per cent LTV accounts for about 2 per cent of new advances – a figure unchanged for the third quarter in succession. So while it is positive to see innovation products and schemes, little will change for most first-time buyers until lenders loosen the purse strings.
"Just opening an account and saving regularly will not guarantee you the mortgage you require. Nationwide will still, quite rightly, go through their normal application and affordability underwriting process, and it remains to be seen whether the credit scoring hurdles are higher at this level," says Andrew Montlake of independent mortgage broker Coreco.
Andrew Montlake, Coreco
"Nationwide's latest product is a welcome addition to a market that has been strangled in recent years and will give some first-time buyers a glimmer of hope. While it may seem innovative, in actual fact products such as these mark a return to the days when bank lending was provided on a relationship basis rather than a one-off transactional process."