Money Insider: First-time buyers need the help of 95% mortgages


The latest figures released by the Council of Mortgage Lenders made grim reading this week, as it reported new lending was at its lowest for 12 months. It was estimated that £10.2bn was lent in April, almost 20 per cent lower than the March figures which were inflated due to first-time buyers trying to complete their purchases before the stamp duty concession came to an end.

Although the mortgage market has been fairly buoyant since the turn of the year, there is increasing concern that eurozone issues could have an impact on mortgage pricing and lead to lower levels of activity.

On a brighter note, Clydesdale and Yorkshire banks this week reaffirmed their continuing commitment to supporting first-time buyers and remain among only a handful of lenders prepared to lend up to 95 per cent of the property value. Last year these banks reported that around 13 per cent of approved mortgages were for first-time buyers with the average price of that first home coming in at £121,717.

The latest pricing changes see the 95 per cent LTV (loan-to-value ratio) mortgage from Clydesdale and Yorkshire cut to 5.99 per cent fixed for three years with the product fee scrapped. For those with a 10 per cent deposit, the rate has been cut to 4.99 per cent.

While the 95 per cent rate looks high when you compare it against the current 4.19 per cent deal from The Co-operative Bank for advances up to 85 per cent, regulatory constraints force banks to set aside between six and eight times as much capital reserves for high-value loans, hence some of the funding cost is passed on to the customer.

A lack of suitable, first-time buyer finance being made available during the last three years has fuelled the demand for rented property, and due to limited supply, rental costs are soaring.

So while the 5.99 per cent rate may seem steep, it's a full 1 per cent cheaper than Clydesdale and Yorkshire were charging last year, as well as no longer having to find a £599 product fee.

The option to be able to buy subject to finding a more realistic 5 per cent deposit (in this example £6,086) may still appeal when comparing the monthly cost with that of a rented property.

A 95 per cent mortgage based on the average first-time buyer property price of £121,717 equates to £115,630 and would require monthly repayments of £744.30 on a 25-year home loan.

If, on the other hand, you decided to try and save a bigger 10 per cent deposit as demanded by other lenders, your monthly payments at 4.99 per cent rate would be £639.75 per month, £105 per month less – a reasonable trade-off for that extra couple of years of hardship, struggling to amass the extra 5 per cent?

The mortgage market remains subdued and there's little likelihood of this changing in the short term, and with the stamp duty concession no longer available, first-time buyers need all the help they can get.

To keep things from grinding to a halt, those who can service a 95 per cent LTV mortgage should be able to do so.

Inflation fall benefits savers

There was better news for savers this week when the latest inflation figures revealed that the Consumer Price Index (CPI) measure fell from 3.5 per cent to 3 per cent in April, the lowest since February 2010.

To get a real savings return after tax, savers (paying basic-rate tax) need to attain a gross interest rate of 3.75 per cent, and while this isn't achievable on instant-access accounts, it is possible on fixed-rate bonds with a two-year term from the likes of Investec at 3.8 per cent and Close Brothers Savings at 3.75 per cent.

If you haven't taken advantage of your tax-free allowance for 2012/13, then there are plenty of opportunities to earn a rate higher than the 3 per cent CPI figure. For example, on one-year, fixed-rate ISAs, SAGA is paying 3.6 per cent, Santander 3.5 per cent, and Aldermore 3.3 per cent.

If you're not comfortable tying your money up, instant-access ISAs from Cheshire Building Society pay 3.35 per cent and Santander 3.3 per cent.

Andrew Hagger –