People's Bank lends a hand to first-time buyers
The Post Office, which re-entered the home loans market last October, is offering a 90 per cent mortgage with an affordable rate to buyers with smaller deposits. Simon Read finds out how the experts view it
Saturday 15 May 2010
Lord Mandelson may have vacated his government office this week, but a legacy of his time as Business Secretary was his £180m plan to turn the Post Office into a people's bank. The move took a step closer this week as it launched its 90 per cent mortgages, aimed at helping first-time buyers.
The Post Office only re-entered the mortgage market last October with a range of fixed-rate and tracker loans. At the same time it trained some staff at large branches so that they could help to explain mortgage options to borrowers. This week's move is aimed at offering prospective homeowners a way to borrow if they have a deposit of only 10 per cent. It's not only available to first-timers, but also to home-movers.
"While there are existing 90 per cent deals available, many remain out of reach for most borrowers because the rates are too high," says the Post Office's director of personal lending, Marco Hughes. "Instead, we're offering more affordable rates that will allow more borrowers the opportunity to take out a mortgage with a smaller deposit. This should particularly help first-time buyers. However, we are not forgetting those looking to move lenders and are offering a new 'fee free' range to help them too."
Are the new deals competitive? We've asked a range of experts for their thoughts on the Post Office's move.
Before we hear their views, let's look at the details of the new offering. The new 90 per cent mortgage range includes a two-year fixed rate at 5.45 per cent, a three-year fixed rate at 5.99 per cent and a five-year fixed rate at 5.99 per cent. There's also a tracker at 5.49 per cent for those who want to back a hunch that rates will remain low over the next couple of years.
For those with a slightly larger deposit, the Post Office has also expanded its range with new 85 per cent deals including a two-, three- and five-year fixed and a tracker and has cut fixed rates on its existing 75 per cent and 80 per cent loan to value ranges by up to 0.36 per cent.
"It is great news that the Post Office is offering high loan-to-value mortgages as these are the hardest to come by in the present climate," points out Melanie Bien, director of the independent mortgage broker Savills Private Finance. "Before now, the Post Office insisted on a 20 per cent deposit, but the Government intends for it to be a 'people's bank', offering mortgages at higher LTVs of 85 and 90 per cent because there is a serious shortage of such products.
"Even more encouragingly, the rates on the 90 and 85 per cent deals are competitive. Borrowers at this level tend to pay a significant premium because lenders regard them as being higher risk than someone with a bigger deposit; however, the Post Office offering is more reasonably priced."
Andrew Hagger, analyst at Moneynet.co.uk, says the Post Office's move is just the latest trend in a greater focus by lenders on borrowers with smaller deposits. "Slowly but surely more mortgage providers are turning their attention to the first-time buyer market and these latest 'best buy' deals from Post Office follow hot on the heels of similar 90 per cent loan to value products launched by Co-operative Bank/Britannia on 30 April," he says.
"However, a 10 per cent deposit is still a big ask for many young people looking to get on to the housing ladder, although the temporary increase in the stamp duty threshold to £250,000 will help to offset some of the upfront costs."
It's not surprising that the rates are much higher than the lower loan to value deals due to the additional risk lenders have to take. However at least would-be new homeowners now have a far wider choice of products to ponder, Hagger points out. He says the number of 90 per cent loan to value mortgages has more than doubled in the last 12 months, with almost 150 deals available today.
"There has been a growing number of lenders dipping their toe at higher loan to value deals, but the products remain pretty thin on the ground, so any launch like this will come as a real boost to those with smaller deposits
and first-time buyers in particular," says David Hollingsworth of the mortgage broker London & Country. "The more lenders that re-enter at higher loan to value, the greater the level of competition should be, helping to draw more lenders into the sector and improve the products on offer to borrowers.
"However, considering the state's stake in other banks it is perhaps a surprise to see the Post Office – where the mortgages are funded by Bank of Ireland – being put forward by the Government as key in the development of first-time buyer products. But ultimately any growth at that end of the market has to be a welcome one," says Hollingsworth.
David Black, banking analyst at Defaqto, picks out the Post Office's five-year fixed at 5.99 per cent and the tracker at 5.49 per cent as being best buys. "However, if you already have a mortgage it's worth checking to see if your lender has any 'existing borrower only' deals, because some of these restricted mortgages are very competitive for high loan to value loans," he advises.
"The availability of 90 per cent loan to value mortgages is gradually increasing, and the Post Office's new rates are certainly a welcome boost in the right direction, but it remains the case that there is still a massive premium payable on high loan to value mortgages compared to the keenest rates which are available for mortgages up to a maximum of 75 per cent loan to value," Black says.
He adds that the offer of fee-free remortgages is a good one but that borrowers should base their decision on the total cost of the mortgage over the initial rate period, factoring in both the interest rate and the fees.
Borrowers should get advice before signing up to any deal, says Melanie Bien. "The big downside of these new Post Office mortgages is that they are only available direct from the Post Office, not through brokers. It seems a risky strategy for someone taking out their first mortgage, and at a relatively high loan to value, to receive no independent advice at all.
"A mortgage is such a big financial commitment that borrowers must ensure they understand exactly what they are taking on and compare any product with what else is on the market. It is vital that they do the sums to ensure that they can afford the repayments," says Bien.
End of hips 'great news for home market'
There was a instant boost for the property market this week as the new Government announced plans to scrap the much- criticised and expensive Home Information Packs (Hips).
"This is great news for the housing market and for house buyers, few of whom have paid much attention to these pointless packs," says Peter Bolton King, chief executive of the National Association of Estate Agents. "It is also good news for sellers, who will no longer need to shell out hundreds of pounds for a piece of pointless regulation that benefits no one."
Hips were introduced as a way to speed up the homebuying process by providing buyers with all the information about a property upfront. But plans to include a mini-survey in the form of a home condition report were scrapped amid arguments over who would pay for them and how they would be policed.
The packs ended up as an expensive extra for home sellers who had to shell out up to £500 for them. They included documents such as terms of sale, evidence of title and an energy certificate. The latter will be retained as they are mandatory under EU law.
"Energy Performance Certificates were the valuable part of the package, and we welcome its retention as an environmental policy," says Dominic Agace of the estate agency Winkworth. "It makes homes cheaper for people to live in as the overall housing stock improves in time, and in turn improves our overall energy consumption as a country."
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