Lowering the property ladder

Business Correspondent/Personal Finance Editor

Sunday 20 May 2012

The mortgage squeeze is gripping tighter, with banks less willing than ever to help homebuyers who only have small deposits, according to a new survey.

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As the latest government initiative for first-time buyers is launched, can such measures really reinvigorate the housing market? By Simon Bain

So where can aspiring buyers turn, and can the new home mortgage indemnity scheme, already launched in England and now on the runway in Scotland, make a difference?

Loans on typical first-time buyer property (worth up to £125,000) were 5% lower in April than in March and 1.2% below their level a year ago. "Banks blamed increasing mortgage funding costs and renewed fears over their exposure to the eurozone crisis for the reduction in lending," said surveyor e.surv, which produces the monthly monitor.

According to MoneySupermarket there are 187 fewer first-time buyer mortgage products on the market than a year ago, and less than one-tenth of the products available five years ago.The average loan to value (LTV) for products available to new buyers is 78%. Later this month, MI New Home will be launched by industry body Homes for Scotland, with Housing Minister Alex Neil promising that the scheme "will inject new life into the housing market". The target, over three years, is to help 6000 first-time and other buyers currently locked out of the market.The scheme, supported by builders as well as government, is an insurance fund to protect lenders if the borrower defaults. That security means the lenders can underpin 90% or 95% loans with selected builders instead of the normal 85% maximum on new property.So it's fine for lenders, but how attractive will it be to borrowers? One issue may be the cost of the mortgages on offer – Santander entered the English market this week with NewBuy products for new-build properties at a £99 fee and rates of 5.49% to 5.99% over three to seven years.Those rates may pass muster if nothing else is available, but newbuild is not what every first-time buyer is looking for. Many aspiring owners will still prefer to buy second-hand more cheaply and take on DIY, rather than expect an instant "dream home". And new homes like new cars have a premium priced in which disappears when the key enters the lock. That meant if prices don't go up, the buyer is in negative equity – and lenders know it.Mark Harris, chief executive at mortgage broker SPF Private Clients, says: "Lenders are very cautious because in the past new-build has not held its value as well. People might go for this thinking it means they can get on the ladder, but you may still have to put down quite a lot of cash." If your dream home has a £150,000 price tag, the bank may value it at only £135,000. So even with a 95% mortgage you could still end up needing a deposit of over £21,000 or almost 15%.No wonder the housebuilders have been rushing to offer incentives to new buyers. The biggest potential leg-up available to buyers is shared equity.Alison Mitchell, mortgage expert at independent financial adviser Robson Macintosh, says: "There are a lot of products out there that allow parents to help children out, but this is a way of allowing to stand on their own two feet. They can feel the flat is theirs, and if it goes up in price they will get a percentage of the uplift."Meanwhile, housebuilders are vying to offer the most attractive incentives to get their newbuilds away. Taylor Wimpey, for instance, will match the deposit put down by buyers, up to 10% of the property's value on selected homes. The boost comes as an interest-free loan over 10 years. A similar deal is on offer with shared equity, where the builder puts up 15% of the price over a 10-year loan period on selected homes priced at up to £170,000.Audrey Ross, Taylor Wimpey's sales and marketing director, says: "Newbuild offers buyers more options to get on the move than the second-hand market, and by encouraging sales and assisting the customer housebuilders play a fundamental role in keeping the market moving." Builders also help to stimulate the second-hand market when they step is as "guaranteed buyers" in part-exchange offers. Ross admits: "The solutions Taylor Wimpey offers used to be just 'incentives'. However, now they are a 'must do' to help customers get on the move." Perhaps it's working. Barratt recently reported sales up 40% in Scotland since last summer against 27% across the UK, while Taylor Wimpey posted a £230 million profit turnaround UK-wide last year.Stewart Milne, meanwhile, is offering the only "100% mortgage" on two to six bedroom houses, at a monthly cost which it says is "only £70 above the average 90% mortgage deals on the high street" (based on a purchase price of £180,000).Lenders continue to dangle more modest incentives. Clydesdale Bank, one of the few lenders to sustain 95% loans, last month reported strong interest in its regular home saver account which offers up to £1000 cashback when the saver takes out a first-time buyer mortgage. Bank of Scotland will refund new buyers 50% of stamp duty up to £1250, while Lloyds TSB offers first-timers up to £760 towards fees and £500 cashback.Alistair Forrest, an HGV driver, and his wife Nicole, a nurse at the Sick Kids in Edinburgh, have moved into a four-bedroom detached house at Wester Grove in Bathgate, but only thanks to a part-exchange deal.Forrest says: "Our family circumstances were changing and we needed a larger house because my mother-in-law was coming to stay with us. But we couldn't sell the house the way the market was." Taylor Wimpey offered "round about what we wanted" for the family's three-bedroom house, he says, enabling them to stay in the area where sons Vaughan, 16, and Lewis, 13, go to school. Forrest says the move was stress-free. "Without Taylor Wimpey's help with part-exchange there's no way that we'd have been able to get such a brilliant house."

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