Over the past 12 months, the introduction of the government and Bank of England’s Funding for Lending scheme has attributed to steady drops in mortgage rates across the market. It’s perhaps too early to say that the scheme has been a resounding success, but the chance for lenders to access cheaper funds to pass savings to borrowers has encouraged competition and added some stimulus to the ailing sector. Although this in no way suggests a full market recovery, especially with the over-hanging fear of a further dip into recession, it is a heartening point for the UK borrower in these financially trying times.
What has clearly been missing with the advent of more accessible funds are a range of more affordable choices for the first time buyer market, particularly those with deposits that don’t scale the dizzy heights of 15-20%. House purchasing has always been a costly enterprise, but for fledgling borrowers the minimum requirements to purchase since the financial crisis first hit in 2008 have been consistently preventative.
Prior to the collapse of the market in ’08, there were a plethora of options for first time purchasers to consider. The market was flush with 5% deposit deals, and it should also be noted that many lenders were still running 110-120% loan to value options. Although there has continued to be a healthy desire for options catering to those with a lower deposit fund, it is easy to forget that the downfall of Northern Rock was partly based upon their substantial market share in the high LTV sector. Having noted the banks rapid decline from top high street lender to a fully government backed entity, surviving lenders vastly retracted options over and above 85% for several years.
For the past two years the banks and societies have gradually re-introduced a range of 10% options for borrowers, although it has been clear that the appetite is lacking, with many deals historically sitting 2-2.5 per cent higher than those rates offered with a 15% deposit. However, just this week Halifax have vastly reduced their first time buyer 90% deposit rates below 5 per cent for the first time in 5 years, and many lenders are offering options with at reduced margins, or with lower than average fees or incentives. On the crest of this new found optimism, Lloyds and Barclays Bank have entered the market with a range of assisted mortgage options, to allow first time buyers a chance to purchase. Lloyds announced this week that they will commit £6.5bn to assist borrowers onto the ladder, off the back of many promising market forecasts that suggest 2013 will be a busy time for the lending and housing sectors.
Both schemes vary in format, but the principles remain the same. The Lloyds Lend a Hand proposition requires a benefactor to put 20% of the property’s value into a linked savings account, with these funds adding to the borrowers 5% deposit. The rates on offer are favourable, with a highlight for a Lloyds current account holder set at 3.99 per cent. The main caveat for the assisting party is that they can only withdraw their funds from the savings account after 42 months, if the mortgage has been reduced to 90% or less of the property’s value. If there is any decline in the market, or prices do not continue to rise, the funds may stay in situ for quite some time.
Barclays Family Springboard product allows a borrower to raise a mortgage with a 5% deposit, if they have a relative that will put down funds to secure the mortgage. The relative would be required to open a Barclays Helpful Start savings account, which is then linked to the mortgage. The assisting family member is then required to deposit 10% of the property’s value into the savings account, which will earn a current rate of interest of 2 per cent. The only current deal offered is a three year fixed rate at 4.69 per cent, with potential for existing Barclays current account holders to pay no fee for the mortgage, or £499 to those without an account. After a period of three years the relative can withdraw their funds from the account, interest included, if the borrower has been consistent with their monthly payments.
There are several other deals that mirror the process in the market, but what is clear is that lenders are currently not willing to back high end LTV options with their own funds. There are inherent risks with both deals; if the market dips or payments are not continuously made, the relative or benefactor stands to lose part or all of their funds. And the requirement to waive all rights of access to the funds for at least three years may be off-putting for many likely candidates. But if saving a deposit proves to be a protracted and unlikely proposition, these schemes may be the best choice for many first time buyers struggling to purchase. It seems to be highly unrealistic to envision lenders flooding the market with unsupported 5% deposit deals over the next 12-24 months.
Article by: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
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