Model citizens can get the best deals

Timothy Barber
Follow Timothy
THE turmoil of the past two years has been unforgiving for first time buyers. In the boom times they were falling over themselves to snap up properties before prices shot up further, fuelled by a plethora of mortgages that offered 100 per cent borrowing and sometimes even more than that (thank you, Northern Rock). By last year, first timers needed to scrape together huge deposits to access even half-reasonable interest rates from a mortgage pool that had become a puddle.

Since then, there has been a trickling of good news for first time buyers, most notably when Alistair Darling scrapped stamp duty for homes under £250,000 last year. More promisingly, while 100 per cent mortgages remain a surreal memory, a number of lenders have lately been re-introducing 90 per cent mortgages.

“Many companies are still maxing out at 80-85 per cent, but there’s probably twice the number of 90 per cent mortgages around compared to this time last year, and that will help bring rates down,” says David Hollingworth of mortgage advisors London & Country.

Still, the rates of interest for these will tend to be pretty restrictive. The Post Office is a recent entry to the 90 per cent market, offering a two year fixed rate deal at 5.45 per cent interest; at a loan-to-value (LTV) difference of just 5 per cent less, the lender offers an 85 per cent mortgage at just 4.29 per cent. By comparison, a 70 per cent mortgage with HSBC has an interest rate of 2.99 per cent – the benefits of scraping together as big a deposit as possible is still key for first time buyers, and will remain so, says Hollingworth.

“The deposit is the main challenge for new buyers, but the bigger the deposit the better the rate you can secure, and the changes in these rates even in small increments of the LTV can be significant.”

For those taking the plunge, the prevailing view is of a more stable market than a year ago, in which prices may show a small gradual rise over time. Not that it’s likely to get much easier for first timers who, as well as a minimum 10 per cent deposit, need to meet much stiffer credit scoring criteria than they used to.

“You have to be a model citizen to access those 90 per cent deals, which includes making sure you’re on the electoral role where you live,” says David Hollingworth. And don’t assume that not having a credit card will benefit your credit score. “Lenders are looking to see how you’ve managed credit in the past, so it can harm your score if you haven’t.”

The most popular way of boosting that deposit is through parental help – the Council of Mortgage Lenders says 80 per cent of first time buyers now use the bank of mum and dad. An alternative to parents simply donating lump sums is a guarantor deal, in which parents increase their children’s borrowing capacity by standing guarantor to the extra borrowing amount. Another option is an offset mortgage, in which parents put a portion of their savings into an account with the lender to act as security against the value of the mortgage.

“It means parents can help out while remaining in control of their savings, rather than sinking their money into the deposit,” says the Newcastle Building Society’s Steve Urwin.

When it comes to choosing fixed or variable rates, first timers tend to go for fixed rates to simplify their commitment. While the minimal current interest rate makes a tracker attractive, if you can find one, bear in mind that from here rates will only ever go up.

“If you’re paying on a low tracker rate now, it’s worth squirreling some extra away each month for when rates go up,” says Hollingworth. “If you go for a fixed rate, consider fixing it for five years rather than two. You’ll pay a bit more, but give yourself security in uncertain times.”