Tempting first time buyers back into the mortgage market

Finding a first time buyer in the housing market is almost as difficult as finding an affordable home for a first time buyer. However, moves are afoot to tempt them back into the housing market.

Some areas of the country have become almost off-limits to first time buyers after the surge in property prices over the past couple of years. According to Halifax, 92% of the UK's main postal towns are now considered to be unaffordable for people wanting to buy their first property. And even if would-be homeowners can afford their dream home, so-called "mortgage-phobia" is reported to be taking its toll.

Alliance & Leicester Mortgages' quarterly "Movingimproving" Index has revealed that more than six million Britons would rather rent than buy, and nearly half (47%) of those who would rather rent are nervous of getting on to the housing ladder because they fear the cost of a mortgage.

Stephen Leonard, director of mortgages at Alliance & Leicester, says, "It seems the cost of a mortgage is the main reason why many people choose to stay off the property ladder. Of those who would rather rent, nearly half think a mortgage is too expensive or too much of a commitment."

But the news is not all bad. House prices are starting to stabilise, allowing home-buyers' wages to make some headway towards catching up with house price inflation.

Leonard adds, "People are afraid that mortgages are unaffordable, but the reality is that even though a mortgage is a financial responsibility, it neednt be a burden if people get the right deal to suit their circumstances.

"The mortgage market is becoming increasingly competitive and borrowers can take advantage of the increased rivalry between lenders to provide the best products and rates."

This rivalry has had the effect of putting a brake on lending rates. While the recent quarter point drop in the Bank of England base rate may have had a less than spectacular effect on some variable rates, fixed term rates from many lenders - which are determined by the "swap" rates at which banks lend money to each other - are still looking appealing.

Why not pick a fix?

Among the rates to come down recently is Portman's two-year fixed rate, which has fallen from 4.34% to 4.20%, making it the lowest two-year fixed rate on the market. Meanwhile Bank of Ireland has cut its two- and three-year fixed rates from 4.55% to 4.35%. Among other good deals are Nationwide, which has a two-year fix at 4.39% and Scottish Widows, whose two-year fix is 4.49%.

Among the longer-term fixes, the newly named Leeds Building Society (formerly the Leeds & Holbeck) has a 10-year deal at 4.65%; and Britannia and Yorkshire both have offers at 4.74%. Leeds is also offering a two-year fixed-rate offset deal at 4.69%.

Shorter can be sweeter

First time buyers tend not to stay in their first home very long, so although 10-year fixes may look tempting, borrowers should not be looking at longer-term deals unless they are sure they will stay put or the loan is fully portable, as redemption penalties may be imposed if the loan is paid off early. These penalties can outweigh the benefits of an otherwise attractive rate.

Watch out too for weighty valuation fees and booking fees on special deals, which are usually non-returnable if you don't go ahead with the loan. As lenders attempt to push headline rates down to make them appear more attractive, they often impose other hefty charges, which can push back up the total amount you pay. It is important when assessing the cost of the loan to look at the total interest cost over the period that you expect to maintain the loan rather than just the headline rate as, particularly for smaller loans, the fees can make a loan more expensive than a seemingly higher headline rate.

Out for the discount

If you are wary of going for a fixed rate, a discounted rated might be more suitable. Internet bank First Direct has just launched what it is dubbing its "cheapest ever mortgage" a discounted variable rate loan at 2.99% until May next year. At the end of the discount term, borrowers pay the standard variable rate - at present a competitive 5.5%.

As much as you can afford?

A number of lenders including Alliance & Leicester, Halifax, Nationwide and C&G are helping first-time buyers by scrapping the traditional income rate multiples on which lending decisions are traditionally based, and instead using a measure of "affordability" - the borrowers ability to pay for a mortgage based on an assessment of their income compared with their other outgoings and existing debt. Under this system single people with no liabilities will tend to come off better, though those with children and existing debts will do less well.

Sharing the mortgage costs

Several lenders have also introduced "shared mortgages", which allow other members of the family to guarantee the loan or contribute towards paying for it.

Rachel Mckay of Moneyfacts says, "With a fairly stagnant housing market in the UK at present, lenders and independent financial advisers can no longer rely purely on remortgage business. A kick-start from the first-time buyers sector is now seen by many as the way to stimulate the mortgage market from the bottom up."

With Norwich & Peterborough's Lend A Hand loan, the first-time homebuyer and the parent or other guarantor become joint applicants on the mortgage and are both responsible for the mortgage debt. The property buyer - the "child" - must be able to support a minimum of 75% of the required loan, based on N&P's affordability criteria. Importantly, to avoid capital gains tax implications, the parent is not named on the legal title of the property and does not actually have to hand over any money.

Gary Lacey, group product manager for N&P, said, "The Lend A Hand scheme is unique in that it does not limit the first time buyer to one particular type of mortgage - they can choose any one from N&P's wide range of fixed rates, discounts, and trackers."

The account is similar to Bank of Ireland's 1st Start mortgage which also allows parents to use their income, less any mortgage repayments, as the basis for their childs mortgage.

An offset mortgage can also be used to help a first time buyer. Yorkshire Building Society has a loan called Offset Plus, which allows borrowers and family and friends to offset their savings against the loan. Cheltenham & Gloucester has a similar product.

Other members of the family retain control over their savings, as they remain in separate accounts. The interest on the savings is however laid off against the interest owed on the loan giving interest rate and tax advantages to both parties.

20 September 2005 © Moneyextra.com

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