The 95% mortgage is back
After years struggling to save big deposits, first-time buyers are hopeful of getting on to the property ladder as lenders line up to offer 95% mortgages
guardian.co.uk, Friday 27 January 2012 22.58 GMT
Five years ago there were more than 800 different 95% mortgages available to first-time buyers. When the financial crisis struck, they disappeared from lenders’ shelves almost overnight. But the first few weeks of 2012 are seeing a surprise turnaround – the number of loans on offer has tripled and interest rates have fallen. Will “generation rent”, until now forced into renting because they can’t stump up the huge deposits demanded by lenders, finally be able to put a foot on the property ladder?
This week Leeds building society launched a mortgage that requires a deposit of only 5% and comes with an interest rate of 5.25% (although there’s also a hefty £999 in fees). Last week both Newcastle and Ipswich building societies launched 95% deals, while broker John Charcol says it will unveil a low-deposit scheme for first-time buyers in early February.
It follows the launch of Nationwide’s Save to Buy scheme, in which savers who put money aside for at least six months can apply for a 95% loan, and Lloyds’ Lend a Hand scheme, where first-time buyers can access a 95% deal if they can convince their parents to put their savings up as security against the mortgage.
Buyers able to stump up a larger 10% deposit can enjoy interest rates as low as 3.84% from HSBC – which brings the cost of a mortgage significantly below the average that buyers were able to find during the boom.
Fed up with extraordinary rent rises – mundane flats in London are averaging more than £1,000 a month – and now able to find mortgages with low deposits, first-time buyers are beginning to return to the market in volume.
Rent increases mean buying is now on average 16% cheaper than renting, according to research issued by Halifax today. That represents a remarkable turnaround from 2008, when the cost of buying was typically 29% more expensive than renting.
L&G Mortgage Club, which acts for thousands of estate agents and last year sourced 12% of all UK mortgages, says that so far this year it has witnessed a surge in applications from first-time buyers, particularly in London, Surrey, Sussex, Edinburgh and Glasgow.
“A lot of people were priced out of the market between 2003 and 2007, then, when the credit crunch came along, prices became more affordable, but they could no longer get a mortgage because of the deposits required. There’s huge pent-up demand out there from potential first-time buyers,” says Ben Thompson, managing director of L&G Mortgage Club.
This time last year, first-time buyers made up just one quarter of applicants for loans, but the figure is now nearly one third, L&G says.
But let’s not get too carried away with a market revival. Half of all first-time buyer applicants are rejected when applying for a 95% deal. Only those with squeaky clean credit records get through. The new deals are mostly from small building societies with limited funds. Big banks are still hamstrung by capital adequacy problems, and don’t like lending to first-time buyers as 95% deals force them to set aside more capital.
The ongoing eurozone crisis, rising unemployment and forecasts of further house price falls are also encouraging many buyers to sit tight.
Britain’s property market is still characterised by a “can’t buy, won’t sell” generational divide, according to HSBC’s annual Moving Home Survey, published yesterday.
When it asked people under 34 why they are not buying, 29% cited high deposits, 15% the general problem of finding a mortgage, and 14% worries about unemployment. One tenth said they no longer had any wish to buy a home.
A modest pick-up in mortgage approvals during December is unlikely to be sustained. The Council of Mortgage Lenders said this week total lending in 2011 was £140bn – a small rise on 2010 but still substantially below traditional levels and way below the record £363bn in 2007.
Howard Archer, economist at IHS Global Insight, forecasts a 5% house price fall in the UK this year. “We suspect that low wage growth, a markedly weakening labour market and major concerns over the economic outlook will limit potential buyers and weigh down on house prices.”
But many first-timers will be spurred into buying by the looming end of the stamp duty holiday. Since March 2010, first-time buyers have enjoyed exemption from the 1% duty on properties between £125,000 and £250,000, but this ends on 24 March.
The government hopes taxpayer-backed 95% mortgages for new-build properties, scheduled to launch in April under the FirstBuy banner, will help maintain momentum in the market. Interest rates on the loans, which will be offered in partnership with developers such as Barratt, are still being negotiated but are expected to come in at around 4.25%. Potential buyers can register now, but the first homes are unlikely to be available until September.
How to bag a deal
The key to landing a 95% deal is ensuring your credit record is clean, says Ray Boulger at John Charcol. “You are going to need an excellent credit record. The way the points system works, the longer you have been at your address, the longer you’ve been with your employer, and the longer you’ve held your bank account, the better.”
It doesn’t mean you can’t switch bank accounts – just don’t close the original bank account when you switch. The same goes for the electoral roll – when you go to university, keep your electoral roll address at your parents. (You are permitted to register at both your university and home address, but you can only vote at one.)
A clean record on paying the rent also helps. Saffron building society, which offers a 95% deal at 5.79% (and fees of just £195) will accept a tenancy record as evidence that you can afford a mortgage. “If you can prove you have paid the rent [for a minimum of 12 months] we will look at offering a mortgage that costs you up to the same amount per month,” says John Eastgate, Saffron’s sales and marketing director.
Societies such as Saffron use “manual underwriting”, looking at cases on an individual basis and carrying out their own checks and calls, in contrast to the big banks, which tend to use computer-based scoring which results in many potential first-time buyers being screened out.
But the days when you could walk into a bank and obtain a mortgage of five or more times your income are over. Paul Winter, chief executive of Ipswich building society, says borrowers should expect to obtain no more than 3.75 to four times their income. Applicants also go through an affordability test which takes into account more factors than salary. The mortgage will be arranged on a repayment basis, rather than the cheaper interest-only deals popular before the credit crunch.
What’s on offer?
Mansfield BS A three-year discount mortgage that starts at 4.99% and at the end reverts to the society’s standard variable rate (SVR), currently 5.59%. Arrangement fee £999, added to loan. Maximum mortgage £200,000. This deal may be withdrawn soon.
Leeds BS A two-year discount mortgage which starts at 5.25%. At the end of the deal borrowers move to the society’s SVR, currently 5.69%. There is a £199 booking fee and £800 completion fee. Early repayment charges of 3% in year one and 2% in year two.
Ipswich BS A two-year fix pegged at 5.75% until March 2014. Borrowers then change to the SVR, currently 5.49%. Completion fee is £399, application fee is £150. Early repayment charge is 3% of the loan amount.
Newcastle BS A two-year fix pegged at 5.95% until March 2014. Borrowers then revert to the SVR, currently 5.99%. Reservation fee is £195 and the completion fee is £800. Early redemption is charged at 3% of the loan.
Saffron BS A three-year fix pegged at 5.79% until April 2015. Borrowers then revert to the SVR, currently 5.39%. Applicants must be a first-time buyer with a history of 12 months minimum renting. Fees are £195, and early redemption is charged at 2%.
Skipton BS A three-year fix pegged at 5.99% until April 2015. Borrowers then revert to the Bank of England’s base rate plus 4.45%, currently 4.95%. Fees are £195, and early redemption on a sliding scale between 3% and 5%. Skipton also has a five-year fix priced at 5.99% to April 2017 on similar terms.
Nationwide BS The Save to Buy scheme requires that buyers open a savings account with the society which pays interest of 2.5% gross on balances up to £20,000. After at least six months of saving a minimum of £50 a month, the saver is entitled to apply for a 95% mortgage. Currently that would allow a borrower to take a three-year deal at 6.14%, pricier than other deals, but which reverts to Nationwide’s 3.99% rate after that, significantly lower than competitors. Fee is £499.
Lloyds The “lend-a-hand” deal offers a 95% mortgage to someone as long as parents or friends deposit a sum equal to 20% of the loan amount. The helper receives a fixed interest rate of 3.64% on their savings over 42 months. The borrower can then choose from the bank’s range of 75% LTV mortgages, which start at 2.84% for the two-year tracker deal.
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