The best mortgage options for first time buyers

It’s not often that the Council of Mortgage Lenders talks about falling house prices, but it did this week.  House prices will drop if the regulators get their way and restrict mortgage lending, the CML warned.  Lord Turner, chairman of the Financial Services Authority, made it clear in a speech at the Mansion House that new banking regulation might well include powers to restrict loans to value to prevent irresponsible lending.

‘This is just one of a number of unintended consequences of the FSA's well-meaning but misguided proposals that the CML believes the UK's existing 11 million mortgage borrowers have every  right to be concerned about,’ said the CML's director general Michael Coogan.  The FSA does not deny that a drop in house prices could be the outcome of tougher lending requirements.  ‘The golden age of home-ownership is over, for the moment,’ said Coogan.

Crackdown

The FSA is, however, still barking up the wrong tree when it comes to tougher regulation.  In July it pointed out that so-called ‘income non-verified’ loans still made up 43% of all home loans granted in the first three months of 2010.  The much criticised ‘self-cert’ mortgages no longer exist and almost all of these ‘income non-verified’ advances will be low loan-to-value mortgages, granted to existing homebuyers with a good track record of paying.  They are very low risk borrowers.

The most important point made by Coogan was a warning that if prices fall again it would reduce lenders' security, restricting still further the level of lending, mortgage rationing would continue and many more people would be unable to buy their own homes.

Parents want house price drop

However, it appears that not everyone is concerned about a drop in house prices.  Research from the National Housing Federation highlights the fact that parents want a house price fall to make homes more affordable for their first time buyer children who will otherwise face renting, possibly for the rest of their life.

Parents are bending over backwards to help out their offspring.  The report found that nearly 60% of parents feel obliged to give or loan their children money for a deposit. They expect to hand over at least £20,000 to each of their children to get them on to the property ladder.

Lower house prices are a good thing if you are a first time buyer – although a drop in equity for existing homeowners will make it harder for parents to find the £20,000 deposit they are expecting to lend or give their children.

Hurdles

With the price of a first home probably around £150,000 to £200,000 first time buyers with a £20,000 deposit are going to need an 85% or 90% mortgage.  And there are loans of this size available provided the borrower has a good credit track record and can meet the lenders’ tougher affordability criteria.  It isn’t just the deposit that is a hurdle to buying that first home, earnings are an obstacle too.

For those with only a 10% deposit Yorkshire Building Society is offering a two-year fix at 4.99% with a fee of £995.  If you have a 15% deposit the rate is a more attractive 3.99% with the same fee.

Others offering 90% loans include HSBC with a two-year fix at 5.09% and a fee of £99. HSBC is also offering a 90% loan to value tracker at 4.19% for the duration of the loan (Bank Base Rate of 0.5% plus 3.69%) also with a fee of £99.  Both mortgages are available direct from the lender.

Britannia has a three year tracker for those with a 15% deposit at a very competitive 3.19% and a fee of £999 while First Direct has a lifetime tracker at 3.95% (BBR plus 3.45%) with a fee of £99.

It might be safer for first time buyers opt for a five year fix to guard against rising interest rates.  As mortgages are now portable they should be able to take it to a new property if they need to move house during the fixed rate period.