Mortgage options improve for first time buyers

With the housing market in the doldrums, there is more competition in the mortgage market and first time buyers are the main beneficiaries.  There is never a right time to buy your first home but if you need somewhere to live and you can get the 10% deposit together, house prices are effectively static at the moment and relatively affordable for those who are able to make some financial sacrifices. 

In addition, there is no Stamp Duty for first time buyers on houses valued at up to £250,000 – at the moment.  But this concession ends on 31st December and the tax will revert to its old level of 1% on properties worth £175,000 to £250,000.

'Static' house prices

‘Prices are now at a very similar level to that at the end of last year,’ commented Martin Ellis, housing economist at Halifax, which this week reported that house prices are up 4.6% on a year ago. ‘The improved economy, strengthening labour market and low interest rates are all supporting housing demand.  We expect that UK house prices will remain static overall in 2010,’ he said.

Michael Jones, president of the National Association of Estate Agents takes a similar view.  ‘The market appears relatively flat at the moment which we expect during the holiday month of August. What we need now is for the lenders to increase mortgage availability particularly to first-time buyers.’

First time buyers fuel the market

In the days when building societies were the only institutions lending for house purchase, they willingly accepted that they had a social responsibility to enable young couples to buy their own homes and even when money was in short supply, 90% loans were available.  Even today, the banks - not exactly charitable institutions - realise that the market needs new buyers at the bottom if homeowners further up the ladder are to move up.

But they are not stupid and the banks are using first time buyer mortgages to attract new customers so many of the offers are ‘direct only’ and may require the borrower to open a current account with the bank.

Top rates

HSBC, which has for a long time had many of the market leading mortgages in the ‘best buy’ tables, has launched two 90% loans for first time buyers with a low fee of £99.  There is a lifetime tracker at 4.19% (Bank Base Rate plus 3.69%) and a two year fix at 5.09%. 

But it is a pity that HSBC hasn’t also introduced a five year fix with a 90% loan to value.  Interest rates will be going up at some stage and a two-year fix could leave FTBs searching for a new loan just at a time when mortgages are more expensive.  A five year fix would be the best product for FTBs who need certainty. 

A survey from Fair Investment Company showed that 69% of those questioned believed interest rates will be higher this time next year.  Alan Clarke, economist at BNP Paribas, suggests when rates do start rising, they will do so at a ‘fairly chunky pace’ and predicts a rise to 2.5% by the end of 2012. 

The best 90% longer term fix comes from Britannia and Co-op Bank and is available direct on 0800 013 1140.    It is fixed for five years at 5.89% and there is a fee of £499.  It is available only for purchases, not remortgages.  The Post Office also has a 90% five year fix at 5.99% which is available only through intermediaries.  This carries an early redemption charge payable of 5% of the amount outstanding until 30/09/2015 - but as the loan is portable and can be taken to a new property, this is not too much of a problem. 

HSBC’s five year fix is at a very competitive rate of 3.94% - again, a market leader.  But to qualify you need a 40% deposit - way out of reach for the vast majority of FTBs.  Norwich & Peterborough Building Society has just introduced a five-year fix at a market leading rate of 4.49% and loans up to 80% of the property’s value are available.  The fee is £995 and there is an early repayment charge during the term of the fix but you can repay up to 10% of the capital each year without penalty.  This is a very good deal.

Remortgaging decision

Meanwhile, those looking to move house or remortgage face the dilemma of whether to go for a fixed or variable rate.  This week the Bank of England kept UK interest rates on hold at a record low of 0.5% for the 18th consecutive month.  While the Monetary Policy Committee's decision had been expected, calls have been growing for an increase in rates to curb inflation so rates will have to move up eventually.