Will new low-cost loans finally help you to buy your first home?

By Sam Dunn

PUBLISHED: 14:34 EST, 8 October 2013 | UPDATED: 03:14 EST, 9 October 2013

The starting pistol has been fired on a race for cheap mortgages for first-time buyers and movers.

Yesterday, the Government launched the latest phase of its Help to Buy scheme, which guarantees loans for buyers with small deposits.

Ministers hope it will get the whole of the UK housing market moving again — not just London and hotspots across  the South-East.

A way up: The new deals unveiled yesterday herald the launch of the second phase of the Government's flagship Help to Buy scheme in bid to help first-time buyers and movers get their foot on the housing ladder

A way up: The new deals unveiled yesterday herald the launch of the second phase of the Government’s flagship Help to Buy scheme in bid to help first-time buyers and movers get their foot on the housing ladder

For those with small deposits equivalent to 5 per cent of their property’s asking price, the early signs are encouraging.

State-backed RBS and NatWest are offering a 4.99 per cent two-year fixed deal or 5.49 per cent over five years, both without a fee.

In the case of the two-year fix, this is nearly a whole percentage point cheaper than the nearest rival deal available  on the open market at Newcastle  Building Society.

For hard-pressed buyers, this adds up to a monthly saving of £86 on a typical £150,000 home loan and £2,259 over  two years.

Rivals Halifax and Bank of Scotland — also part-owned by the Government — have rolled out a deal at a higher 5.19per cent (plus a £995 fee) for those who have saved the same sized deposit.

Buy a £600,000 home with a 5per cent deposit

The new deals unveiled yesterday herald the launch of the second phase of  the Government’s flagship Help to  Buy scheme.

The first part of this, unveiled in April, allowed buyers to purchase a new-build property. If they put down a 5per cent deposit, they could then qualify for a further 20per cent in the form of a loan from the Government that is interest-free for five years. With 25 per cent behind them, they could qualify for a number of cheaper mortgage deals.

Some 15,000 such mortgages have already been handed out in the six months since the scheme’s launch.

The second part, which was originally scheduled to launch in the New Year but was moved forward to yesterday, allows buyers to purchase a home — either old or new — for up to £600,000 with a deposit worth just 5per cent of the property price.

The Government guarantees up to 15per cent of the property value for the bank in return for a small fee from the lender. The idea is that this guarantee cuts the risk for banks and building societies and allows them to lower their rates.

The first banks to offer loans were RBS/NatWest and Halifax.

RBS/NatWest says it anticipates a rush in demand from buyers and expects to sign up some 25,500 first and second-time buyers by 2016.

To cater for this, more than 700 branches will extend opening hours for two weeks.

HSBC has announced it will offer Help to Buy loans, with deals expected in November.

Virgin Money and Aldermore Bank will have rates in the New Year.

Other lenders are likely to set out their stall during the coming weeks.

It is hoped the scheme will add oil to the gears of the UK’s housing market. A recent report from the Office for National Statistics (ONS) showed that prices were still falling in some regions — though they were climbing quickly in London and parts of the South.

Justin Modray, of financial advice website CandidMoney, says: ‘If Help to Buy takes off without creating a property bubble, which is debatable, then it could have a huge impact across the country.

‘With growth in prices in towns and cities, it will help encourage job mobility and boost employment (as more people are prepared to move to find work), help fuel investment and bring everything that comes with such an injection of growth, such as improved schools and transport.’

No interest-only and no landlords

Although the scheme will be most appealing to first-time buyers, so-called ‘second-steppers’ — those who already own a home — will also be able to benefit.

OTHER GOVERNMENT SUPPORT

Under the separate Help to Buy equity loan scheme, launched in April, banks and building societies are offering rates from 3 to 3.5 per cent for people with 5 per cent deposits boosted by a government equity loan. This only applies to new-build properties.

The equity loan is interest-free for five-years but then has a charge. 

There is also a NewBuy scheme where house builders and the government are underwriting mortgages with a number of lenders to allow them to provide mortgages to people with a deposit as small as 5 per cent on new build properties. This scheme ends in 2015.

In particular, this will help families who have been stuck in small flats or houses but are desperate to move in order to get more space.

To qualify, the house must be in the UK, worth £600,000 or less, and the mortgage must be a full repayment loan (not interest-only) and cannot be for a second home or buy-to-let. The loan must also not be any other kind of specialist offer, such as an offset or a guarantor deal, or be part of a shared-ownership or shared-equity scheme.

Anyone who applies will face the same scrutiny as other borrowers to ensure that they can afford the mortgage payments. This means every borrower must pass a test to see if they can afford the loan, and also see whether they could cope if interest rates were to rise.

Their income must be checked, and those who have a poor history of repaying mortgages in the past will be barred. This includes anyone who has missed just one mortgage repayment in the past 12 months.

The Council of Mortgage Lenders (CML), the trade body which represents banks and building societies, said that affordability checks would be just as stringent as for any borrower. Beneficiaries will be those who have struggled to save a deposit in order to qualify for a cheap deal.

With RBS/NatWest, you can currently apply for a Help to Buy loan only through one of its mortgage advisers. However, it says its deals will be available through independent brokers later in the year.

Potential customers will get an initial ten-minute check to see if they are eligible to apply and whether they might get accepted for a loan.

At Halifax and Bank of Scotland, the rules are slightly different. As well as over the phone or in a branch, you can apply online and even via an independent broker.

Just 44 deals for first-time buyers

The number of people desperate to clamber on to the property ladder has rarely been higher. After the credit crunch, property prices went into reverse. Hardest  hit were first- time buyers.

As cheap credit dried up, banks were no longer willing or able to offer hefty loans to those with a tiny deposit.

This is because if property prices plummeted, they would be in negative equity — and, in the worst cases, run a greater risk of failing to repay these loans.

There has been a high price to pay for those who can’t afford to save for a bigger deposit. Currently, if you’ve got a chunky 30per cent saved up, the best deal is from Nationwide BS, which charges 2.39 per cent for a two-year fix. On a typical £150,000 loan, the monthly payments are £665 and the overall cost is £16,059.

If you’ve managed to save a 20per cent deposit, the best two-year fix is from West Bromwich BS, also offering 2.39per cent and costing £665 a month. The total cost is £16,259 — slightly higher than the Nationwide one because of a fee.

But if you have only a 10per cent deposit and want a loan over the same period, the best rate is with Skipton  BS at 3.99 per cent.

This works out at £791 with an overall total cost of £18,984 — £2,925 more than if you have 30 per cent deposit.

In August 2007, a staggering 986 different loan deals were available for those who had only a 5per cent deposit. A year ago, there were just 69. Today it’s fallen to just 44 (excluding the new Help to Buy deals).

Today, the average two-year 95per cent rate has a rate of 5.08per cent, according to Moneyfacts data analyst.

For a five-year deal at 95per cent rate, it’s 5.20per cent.

At the moment, the average deposit put down by a first-time buyer is 20per cent, says the CML.

But for many that is an impossible task. With the average house price at £170,000, that means a typical deposit of £34,000 is needed. Now with Help to Buy, first-time buyers can get on the housing ladder with just £8,500 — a much more manageable sum, especially for two working people saving together.

The first part of Help to Buy already appears to have had an impact. According to the CML’s most up-to-date statistics, lending to first-time buyers has hit its largest quarterly total since 2007.

Between April and June, 68,200 purchased their first home. In June alone, its data showed 25,300 loans were advanced to first-time buyers — a 30per cent increase on the 19,400 loans advanced 12 months earlier.

First-time buyers accounted for 46per cent of all house purchase loans in June — up from 44per cent in May — and well above the 38per cent seen on average since 2007.

The new year may bring lower rates

Although some banks are expecting a flood of inquiries, there is really no rush. It will be January before many big names are offering Help to Buy loans, and this is when competition will really hot up.

The more banks enter the market, the cheaper rates could get.

Certainly, those such as HSBC which already have very competitive mortgage rates are expected to offer lower-cost deals than those being proffered by RBS and Halifax.

Don’t expect super-low deals, though, as there is still a fair amount of risk involved in this type of mortgage lending.

Help to Buy ends on December 31, 2016 — so there are three years for it to run. The same principles apply with this scheme as whenever you buy a house: the bigger the deposit you can afford, the cheaper your loan will be and the less at risk you are if property prices should suddenly start to fall.

If you only put down a 5per cent deposit, then it doesn’t take much of a fall in house prices before you are in negative equity.

Beware of cost hikes in the future

While Help to Buy is likely to ease the burden for many buyers today, there are two things to be wary of.

One comes from the dangers of a house price bubble.

If demand for properties soars, so could prices. However, bubbles tend to burst, and if prices suddenly crash, those who bought at the top with just a small deposit could be nursing losses and quickly plunged into negative equity.

The other danger is from rising interest rates. Many economists expect the Bank of England base rate to start rising before 2016. If this happens, mortgage rates are also likely to increase.

When the current mortgage fix  deal ends, buyers may find that the cost of taking on a new loan is a lot more expensive.

If the Government’s guarantee has also gone by then, too, then rates could rise even further.
So although buyers have got on the property ladder, all that may happen is that they have stored up problems for the future.

SHOULD I USE HELP TO BUY?

If you have a 5 per cent deposit, the benefit of these marginally lower Help to Buy rates are unlikely to prove the difference between being able to buy or not.

Time will tell if the Help to Buy guarantee prompts lenders to accept more 5per cent deposit holders from now on.

A 5 per cent deposit will still mean high monthly repayments. On an average property of £164,000 they will be around £930-£950. If you saved for a 10 per cent deposit you could pay closer to £800, a 20 per cent deposit would be around £600 and 25 per cent deposit would mean paying around £500 a month

If you want to live in London, where average values are about £360,000, a 5 per cent deposit would still mean paying about £2,000 a month.

The government guarantee lasts for seven years. The Treasury feels there is less risk of default after this period.

Politicians and economists expect house prices to increase in the coming months so it may be worth getting on the ladder before you are priced out.

However, the early rates don’t seem much better to what is already on the market so it is still worth shopping around.

You will also have to consider how long you want to fix your mortgage for and what the rates may be like in the next two or five years, especially if the Bank of England base rate increases.

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