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

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?

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The Equity Support Scheme lets customers use their savings as a deposit instead of them being swallowed by negative equity

A mortgage deal aimed at homeowners who are trapped in negative equity but keen to move was launched today by the Lloyds banking group.

The Equity Support Scheme will go live next month and is open to existing borrowers with Lloyds TSB, Halifax or Cheltenham & Gloucester – about 3 million mortgage customers in total.

The scheme aims to make moving home possible for customers with low or negative equity. It allows borrowers to move to a property of the same value, buy a bigger home, or downsize without increasing their existing levels of borrowing. They can use any money they have saved as a deposit for the new property rather than having to use it to plug their negative equity gap.

The scheme could be particularly useful for people who bought their first home a few years ago and have found their equity position hit hard by house price falls but now need to move, perhaps because of a new job or a baby on the way.

A Lloyds TSB spokeswoman said that because the scheme was aimed at existing customers it was “more akin to porting your mortgage”. If customers are on a portable deal they will keep the rate of interest they were previously being charged. If not, they have to chose a new rate.

She gave the example of someone whose property was currently worth £110,000 but whose mortgage was £130,000. With the new scheme they could trade up to a £120,000 home while keeping their mortgage as it is. They would use £10,000 they had managed to save as a deposit. Because they now have a property that is worth more their loan-to-value (LTV) also improves, coming down from 118% to 108%.

“We are not increasing the risk for ourselves or the borrower,” the Lloyds spokeswoman said.

David Hollingworth at mortgage broker London & Country said it was good to see an option available to those in negative equity who need to move.

“The product enables a move, though it’s important to point out it still requires a commitment of further funds by the borrower to the new purchase if trading up. It does, however, mean they will not see their savings completely swallowed up in dealing with the negative equity.

“No additional borrowing is allowed, so the LTV will be reduced overall. It will be a niche product as a result but, nonetheless, offers a new option to existing borrowers that could be invaluable where a move is a necessity. It could be preferable to trying to let the property while taking on another mortgage on the new property.”

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Research by Shelter shows millions using credit cards in last-ditch attempt to keep roof over their heads

More than 2 million people have used credit cards to pay their mortgage or rent, an increase of almost 50% in a year, according to the housing and homelessness charity Shelter.

Research for Shelter conducted in August found that 6% of the 2,200 questioned had used credit cards to meet their housing costs in the previous 12 months. This compares to 4% in November 2009, and suggests a national figure of more than 2 million people who are making desperate last attempts to keep a roof over their heads.

With an increased threat of unemployment and rising interest rates, the charity warns that many people will be starting the new year with the threat of homelessness hanging over them once they have exhausted the limited and expensive credit available to them through cards.

Campbell Robb, chief executive of Shelter, said: “This research brings into sharp focus how keeping a roof over their head has become a daily struggle for millions across the country. This is a totally unsustainable situation and one which we fear could see thousands more families pushed into the spiral of debt, eviction or repossession and ultimately homelessness.

“Using credit cards to pay the rent or mortgage is simply robbing Peter to pay Paul. With the average credit card interest rate now standing at over 16% it is the worst possible course of action. Already someone faces the nightmare of losing their home every two minutes, and we would urge every single one of these people now relying on credit to keep their home to seek advice urgently.”

Shelter has a network of advice services across the country which provide free advice on debt and housing issues, as well as a comprehensive advice website at shelter.org.uk/debt.

Kingsley’s story

Kingsley is a self-employed electrician and father of four, and has been struggling to meet payments on a second loan secured on his family’s home since his business slowed down with the recession. He used his credit card to pay December’s instalment.

“I’m under no illusion that I could lose my home. I had a choice of making a late payment or using the credit card to pay the mortgage so I chose the latter.

“Last month I was doing a job, which I can finish within one month and which pays me £3,000. I am thinking that this month I’ll have the money to pay the credit card, pay the mortgage of £368 a month and won’t have a lot at the end of it. I’m hoping that next week I get a call for someone I priced a job for that will be £20,000 worth of work.

“If that comes off, I’ll be OK until April; if it doesn’t then I don’t want to think about the consequences.”

He is now considering declaring bankruptcy and starting again.

Wendy’s story

“I had eight credit cards. I’m 51-years-old and am not daft. I never used my cards in the past, never had any financial problems whatsoever and have always had a perfect credit record. I’m a civil servant, have a responsible job and always maintained my outgoings.

“I’m also a single mum and have been for a while – my problems started when my daughter’s father reduced his maintenance and I had a series of health conditions that necessitated me reducing my hours at work. I didn’t want to but I had to.

“I also went through a very bad divorce which left me with legal bills of £12,000-£15,000, which was a horrendous amount for a single parent.

“My daughter was undergoing psychiatric help because of abuse she had suffered and I wanted to preserve her continuity of life by keeping the same house. So I fought very hard at the time of my divorce to keep the house. It’s only a three-bed semi – not a mansion.

“In order to take the house over I had to prove I could pay the mortgage, but I ended up having to get a £43,000 secured loan on top of my mortgage to pay off solicitors fees, money I’d borrowed from my father and to make up the shortfall to pay off the joint mortgage.

“I had to pay £416 each month for my mortgage with RBS and a £627 payment for a secured loan with NatWest. I fought very hard for that loan and don’t blame NatWest for giving me the loan: it was before my daughter’s father decreased his maintenance and before I reduced my work hours. At the time I could afford it. It was uncomfortable but I was prepared to put up with six or seven years of hardship to maintain the house and the stability in our lives.

“But there was no flexibility and very soon I started to run into problems. I had a growing child, my boiler went wrong which cost £1,500. It got to the stage where the car insurance was due again and other bills accrued.

“So in the past seven or eight months I started to rely on drawing cash from my credit cards and paying it into my bank account, or phoning up and paying the mortgage by card over the phone. I was also paying for clothes for my daughter on credit card.

“You get in the habit of going to the card and thinking ‘when things get better I’ll be able to pay it off’. But it’s the increase in the monthly payments. I was paying £300 a month towards all my credit cards. I haven’t been on holiday, bought lavish clothes or a car.

“My secured loan, mortgage and credit cards come to £1,350 a month and I earn £2,000 a month with everything. It’s unsustainable. I have a 12-year-old daughter, a house to run, food to buy. I don’t have any money left over at the end of the month.

“Two years ago my credit card balances were zero. I managed to pay them off by partially retiring at work but now I owe £14,000 again. Until November all of my mortgage payments were also up to date.

“I can’t do overtime because of medical problems, and my pay has been frozen because of the civil service pay freeze. My daughter’s father lost his job so has stopped paying the £300 maintenance.

“I contacted the credit card companies in October but the majority have never replied. I made an offer to pay 40% of my regular monthly payments for a year to allow me to get back on my feet, and I’m making those payments without their agreement. The stress of it all makes me feel ill. I do worry about it and it’s not something I take lightly. I don’t want anything that wipes the debt. It’s my debt and I want to honour it. It’s just that my circumstances at the moment mean I can’t.

“I would never ever again have a credit card even if I was offered one. It eases your immediate problems but creates greater problems in long run.”

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With two-thirds of homeowners now on an SVR, and interest rate rises expected, borrowers must decide when to fix

The number of borrowers on standard variable rate (SVR) mortgages has risen to two-thirds, according to a recent Bank of England report – a huge rise on the more recent five-year average of about a half. It leaves thousands of households exposed to the risk of interest rate rises.

The Bank of England has also warned that homeowners need to prepare for a series of interest rate rises to about 5% – the “normalised” level. If the base rate were to rise by 5% from its current 0.5%, households would need to reduce their debts by 15% to bring the proportion of disposable income spent on repaying their mortgages down to the long-term average.

Howard Archer, economist at IHS Global Insight, says any early interest rate rise in 2011 would be “bad news” for the housing market and for borrowers. So where does that leave the thousands of people currently with variable rate mortgages?

Melanie Bien, director of independent mortgage broker Private Finance, says there is much disagreement as to when interest rates will rise, with no one knowing for sure. The key is to look at your own circumstances.

“If you would struggle to pay the mortgage if rates were to rise, then a fixed rate is the answer,” she explains. “They are unlikely to get any cheaper. Indeed, lenders are starting to increase their fixed rates, so you may want to secure one sooner rather than later. If you wait until interest rates are rising, you will find that fixed rates will be priced much higher.”

This was echoed by David Hollingworth of independent mortgage broker London & Country. “Borrowers have to focus on their own position and not think about anything else. If they cannot afford base rate rises then they should think about a fixed-term mortgage,” he says.

He adds that it might make financial sense to wait until rates start rising before taking out a fixed-rate mortgage, but acknowledges they would then miss out on the very cheapest deals. “Those that have managed to put aside most of what they saved from being on a cheap SVR or used it to reduce the size of their mortgage will be in a decent position now, especially as loan-to-value (LTV) is so crucial to getting a good mortgage these days.”

Bien says lenders will let you secure a mortgage rate up to six months before you take it out, so if you are currently on a cheap SVR it is possible to book a fix now, which you could move on to in a few months while continuing to enjoy the low variable rate in the meantime.

“Although two-year fixes are cheaper than five-year deals, there isn’t much in it and the latter makes more sense in the current interest rate environment,” Bien says. “If rates do start rising in the second part of next year, as many believe they will, those who take out a two-year fix now will have to remortgage again just when rates are higher. A five-year fix, on the other hand, gives you security for longer.”

She adds there are some excellent fixed-rate mortgages available, but the best rates are only accessible for those with sizable deposits (or equity) of 25% or 40%. “Other borrowers, particularly first-time buyers with deposits of 10% or less, will find it much more difficult to get a mortgage, never mind at a competitive rate. Those with a 10% deposit can expect to pay a premium on the rate of around 2 percentage points compared with someone with a 25% deposit.”

For remortgagers, Bien suggests NatWest‘s 3.75% five-year fix, up to 50% LTV with a £699 fee (which includes valuation and legal costs). For first-time buyers or those with little equity she highlights Skipton building society‘s 5.78% five-year fix, up to 90% LTV with a £995 fee.

For those fixing on short-term deals, Hollingworth suggests Hanley Economic‘s 2.85% two-year fix at 75% LTV with a £449 fee (includes valuation and legal costs); HSBC‘s 3.49% two-year fix at 80% LTV with a £399 fee (free legal work for remortgages); and the same bank’s 3.24% three-year fix at 60% LTV with a £999 fee (free legal work for remortgages), but this product only launches on Christmas Eve.

Hollingworth also likes Skipton’s 4.28% three-year fix at 85% LTV with a £995 fee (free valuation and legal work for remortgages); Royal Bank of Scotland‘s 3.75% five-year fix at 50% LTV with a £699 fee (available on remortgages only with free valuation and legal work); and Darlington building society‘s 3.99% five-year fix at 80% LTV with a £1,074 fee (free valuation in your local area).

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The Council of Mortgage Lenders says £12.4bn was lent in October – the lowest figure for that month since 2000 – as the traditional seasonal uplift failed to materialise

Mortgage lending slumped to its lowest October level for a decade as activity in the housing market remained subdued, figures showed today.

A total of £12.4bn was lent during the month, unchanged from September but 9% lower than in October last year, the Council of Mortgage Lenders (CML) said. It was also the lowest figure recorded by the group for October since 2000.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said: “In a normally functioning market you would expect to see an uplift in overall activity between September and October following a plateau in the summer months. But this isn’t a normally functioning market.

“Borrowers are nervous, even more so since the spending review and confirmation of some half-a-million public sector job losses. This fear for their personal circumstances has contributed towards the drop-off in mortgage applications.”

The CML’s Peter Charles said that while the subdued market is evidence of the severity of the recession, there are key differences between the current economic situation and the downturn of the early-1990s. “There is a lower level of mortgage arrears and possessions, reflecting the significantly lower incidence of job losses and, in particular, the marked difference in the path of interest rates.

“Inflation is expected to remain below the Bank of England’s 2% target rate through 2012 and 2013, and with interest rates rising only slowly and little change in the level of unemployment (as the expansion of private sector employment offsets public sector job cuts), the implication is that mortgage arrears will remain well below previous peak levels.”

But the figures will make grim reading for renters, who face soaring monthly payments, as well as the coalition government, which was hoping its recent cutbacks might help kickstart the housing market.

Figures also published today show that tenant arrears dropped in October and rents rose for the ninth consecutive month, according to the latest buy-to-let index from LSL Property Services. Unpaid rent dropped from £229.3m in September to £221m, meaning 9.3% of all UK rent went unpaid in October, just 0.1% off the all-time low.

In October UK rents rose for the ninth consecutive month, by 0.4% to £691 a month, surpassing September’s record high of £689 and taking annual inflation in the average UK rent to 4.5%. LSL said the average yield for landlords remained stable at 4.9%. David Newnes of LSL added that rents “can only go one way.”

James Moss, director of Curzon Investment Property, said: “Without access to finance buyers cannot purchase homes, and with the situation likely to get worse there is every chance we could see another fall in house prices. The only thing keeping prices stable is the government’s woeful lack of a coherent housing policy – the coalition is building even less than under Gordon Brown.

“Combine this with rising student fees and job losses across the public sector and what we’re left with is Britain facing up to being a nation of renters as the homebuying dream is eroded by another parliament of botched housing solutions and little access to finance.”

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Mortgage lending rose by 5% in July, compared to June, but remains down 3% year on year

Mortgage lending rose by 5% in July compared to the previous month, to £13.6bn, but was down 3% from £14bn in July 2009, supporting claims that the housing market is slowing down.

The gross lending figures, published by the Council of Mortgage Lenders (CML), indicate that lending is on track to meet the CML’s lending forecast of £140bn for the year.

CML economist Paul Samter commented: “It is difficult to see anything other than a slow market for the rest of this year as underlying activity remains subdued. The rest of 2010 is likely to see rather lower lending and transaction numbers compared to the same period last year. Late 2009 saw a pick up as some homebuyers looked to move before the end of the first stamp duty holiday.

“But for most homeowners, the situation is not that bleak. The vast majority of households continue to pay their mortgages in full every month, and many have benefited from the record low interest rates. This looks set to continue for some time yet. While there are a range of risks to the outlook, low rates will further help most stay on top of their finances.”

Brian Murphy, head of lending at independent mortgage broker Mortgage Advice Bureau, said he did not expect any big changes in lending during the rest of the year: “There is no stamp duty incentive in the second half of 2010 so borrowing levels will invariably be down on the same period last year, especially with October’s spending review looming and people choosing to sit on their hands.

“Although the [Bank of England's] monetary policy committee (MPC) voted 8-1 in favour of keeping rates on hold again this month, inflation remains above target and with unemployment likely to rise in the autumn in the wake of public sector cuts, many borrowers are avoiding base rate complacency.

“Perhaps the standout finding in July is that borrower appetite for variable rate mortgages waned and fixed rates were the overwhelming choice. Nationally, we have seen fixed rate mortgages among house purchase customers increase from around 45% in January this year to more than 60% in July. Increasingly, borrowers are aware of the danger of the base rate moving against them and are opting for the safe haven of fixed rate loans.”

However he added that rising average loan-to-value ratios in July were confirmation of growing competition among lenders and a renewed appetite to lend.

The caution exhibited by mortgage borrowers is contradicted by UK retail sales figures released by the Office for National Statistics today, which are up 1.1% on the previous month, and 1.3% higher than July 2009.

Jeremy Cook , chief economist of currency exchange broker World First said: “This is very surprising and flies in the face of recent consumer confidence measures. I always suspected that the summer months would deliver a strong showing for the UK economy. However, this is likely to be the best we will see for a while. With the spending review just around the corner, I expect consumers will tighten their belts for fear of how the cuts will affect the average family.”

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A miscaculation by the Yorkshire and Clydesdale banks means some mortgage holders could be asked to repay up to £300 more each month

Thousands of Clydesdale and Yorkshire Bank mortgage customers are facing higher monthly payments after the providers, owned by National Australia Bank, said they had miscalculated repayments on some of their variable and tracker rate mortgages.

The banks said 18,000 customers have been left with a shortfall on their mortgages, all of who have now been asked to pay the correct monthly amount plus an additional monthly sum to meet the shortfall. According to a spokesman for Yorkshire Bank the affected products are “some variable rate mortgages on which interest is calculated daily, which will include some trackers.”

Around 10,000 of the victims are Clydesdale customers in Scotland, with the remainder Yorkshire Bank customers. In total, £19m has been underpaid with an average individual total underpayment of £800. However, some homeowners face soaring repayments of up to an extra £300 a month.

One mortgage payer, writing on the MoneySavingExpert forum, said: “They are asking for an extra £200 per month for the remaining nine years of our mortgage. This is in excess of £21,000. How is this possible?”

The problem began in 2005 when a mathematical error resulted in over or underpayments being made whenever the Bank of England base rate moved up or down sharply. When rates plummeted in late-2008 to early-2009 customers were not asked to pay enough.

The bank said there were options available to customers, including making a one-off payment to cover the shortfall or extending their mortgage term, and both providers were dealing with problems on a case-by-case basis.

A spokesman for Yorkshire Bank said: “[The banks] have been speaking to the Financial Services Authority and the Financial Ombudsman Service (FOS) about how best to handle this, and they wanted to do it the right way.”

Steve Reid, retail director for the Clydesdale and Yorkshire Bank, said: “We are very sorry that this error has happened and for any inconvenience it may have caused those customers affected. We would like to reassure mortgage customers that they need take no action unless they have received a letter from us.

“The vast majority of our customers are not affected and, of those that are, 99% have already received their letter advising them of the specific impact on their account. The other 1% will hear from us in the next couple of weeks advising them of options to bring their account back on track.”

But Dan Plant, a money analyst at MoneySavingExpert, said: “This huge error could push many borrowers into difficulties paying their everyday bills, as the massive hikes in mortgage payments are unlikely to have been budgeted for.

“However, unlike when customers miscalculate payments and get slapped with huge £30-£40 charges, here the bank has messed up but the customers are still feeling the brunt.”

The website said customers could demand not to pay the shortfall or try and come to an agreement where they only pay a percentage of the cash due. If customers don’t get a satisfactory response within eight weeks or are rejected earlier, they have a right to complain to the independent FOS.

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