Despite the base rate of interest being at an all time low and most areas in the UK having experienced around a 20% fall in property prices, first-buyers are still finding it incredibly difficult to get on the property ladder. This is because they are effectively being ‘penalised’ by lenders because they are unable to put down big deposits. Since the credit crunch began lenders have reserved their best rates for borrowers who could put down a whopping 25% to 40% deposit. For most first-time buyers, this figure is a pipe dream, and even if they can scrape together a 10% deposit – the best they can realistically hope for is an interest rate of around 6%, fixed for two years.
Although interest rate cuts have seen the Bank of England base rate fall from 5% to 0.5% over the last 12 months, this has had a very limited impact on those with limited funds. Figures from the website moneyfacts.co.uk show that the average two-year fixed rate for those with a 10% deposit is 6.12%, which is a whole 4.25% above the rate at which lenders borrow fixed rate funding. Steve Smith from the mortgage broker Chartwell Funding reckons that first-time buyers are being punished for the mistakes made by the banks: “They didn’t get us into this mess, but now they’re the ones paying because banks are unwilling to take risks on loans worth more than 75% of the property.”
Two years ago, rate driven competition led 90% loan-to-value (LTV) to be some of the most competitive home loans on the market. Today the reality is sadly different. Lenders are advertising good rates for first-time buyers but small print means that most won’t qualify. Those who do will then, more often than not, face prohibitive set up costs. Many experts in the industry believe that things will not improve unless there is some sort of Government or external body initiative. In the current climate it is unlikely to come from the banks.
If you’re a first time buyer with a 5% deposit (not unusual) things really are bleak. Yorkshire bank will give you a three-year fixed deal but it comes at a price – a 6.99% interest rate with a £599 product fee. Compare that to approaching the same lender with a 40% deposit – a fixed rate or tracker at a 3% interest rate. Newly launched from Lloyds TSB is the ‘Lend a Hand’ product. The bank offers a competitive 4.39% rate of interest, over three years, for borrowers who can put down a 5% deposit. However, it doesn’t end there; Lloyds TSB are able to offer such a good rate because they take a legal charge on a savings account held by the borrower’s parents. The combined deposit paid by the first-time buyer and parents must equal 25% of the property purchase price. The parents still retain ownership of the money held in the savings account and providing the LTV has moved from 95% to 90% over the three years, the charge on the savings account is released.