Signs of a solution in the case of the vanishing first-time buyers

With mortgages likely to get cheaper and house-price rises on hold, Sam Dunn sees brighter prospects ahead for those trying to get on the ladder
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The Independent Online

So, that's it for another year, then. Without fanfare, fuss or fretting, the final Bank of England base rate decision of 2004 was announced last week. And, as widely predicted, it stayed steadfast at 4.75 per cent.

This lending rate hasn't moved since early August and the stability has provided much-needed room for borrowers to breathe after rates rose four times earlier this year, in each case by a quarter of a percentage point.

The big question, of course, is whether the Bank of England has done its bit - for now - to take the heat out of the UK housing market and curb runaway consumer debt levels.

Many experts now believe that rates are set to fall. From mortgage brokers to lenders, estate agents to housing market analysts, the opinion of many in the industry is that rates have reached a short-term peak and are likely to edge downwards early in 2005.

"There is potential for the base rate to fall between April and June next year," says David Bitner of Bradford & Bingley (B&B). His judgement is based on a fall in the level of consumer credit - the amount of money we borrow via bank overdrafts, credit cards, personal loans and buy-now, pay-later offers - and also in the number of mortgage approvals. These dropped from 89,000 in September to 83,000 in October.

Predictions of a rate cut are further supported by economic factors. Sluggish UK high street sales fell in November by 0.2 per cent, making it the poorest month this year. The fall in the price of oil from its previous record high and a weak dollar have forced down import prices.

This all adds up to downward pressure on consumer prices, explains Ray Boulger of Charcol mortgage brokers. "It increases the likelihood of a base-rate cut earlier than is generally expected," he says.

All the speculation about where rates are going has left many homeowners nervously watching house prices.

Inflation in the housing market has so far run at nearly 17 per cent this year. The Halifax puts the average UK property price at £159,947, but the bank's forecast for 2005 is downbeat: it expects a 2 per cent fall.

Halifax's rival Nationwide, usually the more bullish of the big lenders, is less gloomy but estimates that prices will grow by only 2 per cent next year.

Homeowners who are keeping their fingers crossed about property prices next year could take heart from the Council of Mortgage Lenders (CML) figures, released on Friday.

The CML believes prices will edge ahead by only 4 per cent - good news for first-time buyers in particular, says spokeswoman Jennet Vass: "Essentially, as earnings grow, houses are likely to become gradually more affordable again."

Given this uncertain outlook, it's crucial not to jump into the wrong kind of mortgage, whether you're remortgaging or taking on a home loan as a first-time buyer.

Locking into a competitive two-year fixed rate might look attractive now, but it could end up costing you dear if rates fall as predicted and you miss out on cheaper monthly repayments. So, what kind of mortgage should you be going for?

To take advantage of hoped-for interest-rate falls, a tracker or discount variable mortgage will be your best bet, says Charcol's Mr Boulger. These will follow any downward rate change so that you pay less, but will leave you exposed if rates rise.

B&B recommends the Abbey tracker mortgage, set at 0.31 per cent below the Bank of England base rate for two years. It has a current pay rate of 4.44 per cent.

But there are now some very competitive fixed-rate mortgages, Mr Boulger adds. These deals have emerged thanks to falling swap rates (the rate at which lenders lend money to each other) and fierce competition in the market.

"There are two-year fixes now available below Bank of England base rate, and five-year fixes under 5 per cent," he says.

For example, B&B quotes an offer from Portman building society, which has a two-year fixed deal until 31 January 2007 set at 4.69 per cent.

When moving from one mortgage to another, be aware that many lenders apply swingeing financial penalties if customers leave a fixed-term deal early. Check before you switch.

If you're coming to the end of a two-year fixed deal taken out back in 2002 or early 2003 when rates were cheaper, be prepared for higher monthly repayments if you stay with your present lender. Back then, for example, Britannia building society was offering mortgages at 3.29 per cent; if you were to switch from this to the society's current standard variable rate of 6.35 per cent, your monthly payments would soar.

If you're a first-time buyer, a fixed-rate deal will let you know exactly what you'll be paying each month. On a variable rate, you'll be at the mercy of interest rate moves.

First-timers are essential to prevent the market stagnating, but this year their numbers have fallen alarmingly. A survey from National Savings and Investments (NSI) last week revealed that, on average, first-timers now take four and a half years to save for a deposit on a property.

With the average first home now 12 per cent more expensive than in the first quarter of 2004, and the typical first-time buyer's income increasing by only 6 per cent in the same period, it is harder than ever to get a foothold on the ladder.

In 1994, a typical starter home was only £49,021; today, it has risen to £137,000.

"[A 5 per cent] deposit for the average first-time property in the UK is now nearly £7,000," says Dax Harkins, NS&I's senior savings strategist. "But first- time buyers can reduce the long-term cost of buying a home by starting to save earlier and putting as much as they can towards a deposit."

'We Stretched To Afford A Home - But We've Yet To Start Shrinking The Mortgage'

Today, Liam Wood and his wife Lindsey are sitting pretty in their three-bedroom West Yorkshire home.

One year ago, the couple, who now have a nine-month-old baby, Joshua, bought a house in Pudsey, on the outskirts of Leeds.

Concerned to nail down their monthly expenditure and stick to a budget, they managed to secure a two-year fixed-rate mortgage with Skipton building society, paying 3.89 per cent on their £67,000 loan.

"Lindsey and I went for the fixed deal because we were going to have a baby and the set repayments meant that we knew what our monthly outgoings would be," explains Liam, 22, who works as a sales manager for a photocopier company.

To further reduce their outgoings, the couple opted for an interest-only mortgage. While this means they pay just £219 a month, they are not chipping away at the overall debt, as they would have been had they opted for a repayment loan.

They did consider a repayment mortgage but it would have cost them £400 a month - nearly twice as much as they are currently paying.

Although they are only halfway through their deal, the Woods already have an eye on remortgaging in 12 months' time. They are aware that, as interest rates have gone up this year, their monthly repayments will rise when they remortgage.

If their finances can stretch to it, the couple want to switch to a repayment loan. Otherwise, they will try to do this when they move house, as they intend to in about three years.

"We will probably stick with another fixed-rate deal that lets us set a budget every month," Liam says. "We'd like to get a mortgage at about 5 per cent but it could be a shock moving from our current 3.89 per cent."

To build up some equity with a view to repaying the capital on their home loan, he has decided to take advantage of a share offer from his employer.

"In the longer term, this equity will hopefully pay off some of the home's value," he says.

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