More than 300 new mortgages have been introduced to help first-time buyers get on the ladder since the introduction of the government’s Funding for Lending Scheme (FLS) last August. That has helped the market up to a point – there have been at least 50,000 house purchase loans for 7 consecutive months – but purchase approvals in Q1 were 1.5% lower than Q4 2012.
To the untrained eye, the mortgage market looks in excellent health. There are many new mortgages designed for high loan-to-value (LTV) borrowers, and some fixed rate deals are the cheapest on record.
And as new offers are launched, borrowers with a deposit of only 5% of their property value are accessing record-low deals: Bath Building Society offers a three-year fixed rate at 5.29% with a £850 fee.
Mortgage rates for first-time buyers have fallen as the range has widened. The average rate fell to 4.6% in December, the lowest rate since March 2012 according to LSL Property Services’ latest First Time Buyer Monitor. This was a fall from 4.72% in November. So it’s hardly surprising that 83% of first time buyers chose a fixed rate loan over a tracker mortgage to secure their property in 2012.
And 2 year fix deals are at record lows for established home-owners too, with rates as low as 1.79% for 60% LTV mortgages.
But these headline rates only tell half the story. Although the outlook for the mortgage market has become much brighter, the recovery is still on a fragile footing. With more cheap mortgages and falling rates, it would be logical to assume that more home-buyers are taking out house purchase loans. But this is not the case.
House purchase lending so far this year is lower than it was in the last 3 months of last year, according to data from e.surv’s latest Mortgage Monitor.
So, with so many options for borrowers, why isn’t the momentum stronger?
Tough Lending Criteria
A big stumbling block is deposit requirements. Despite a growing number of deals for buyers with a smaller percentage deposit, the criteria to qualify for high LTV mortgages are stringent. And first-time buyers struggling to save for a deposit often miss out on high LTV deals because they can’t meet challenging criteria on wages and credit ratings. The devil is usually in the detail. Or in this case, the small print.
The average deposit for first-time buyers actually rose in December. The price was £28,525, 2.3% higher than the previous month according to the LSL FTB Monitor. And the average LTV of their mortgages fell from 80.1% in 2011Q4 to 78.8% in 2012Q4.
There are so many obstacles that 49% of first-time buyers in December were only able to buy because of family help, with 36% turning to family for cash for a deposit. And 42% of buyers who didn’t qualify fell flat because they couldn’t put together a big enough deposit.
The ongoing struggles of the economy are a huge factor. Inflation and low savings rates are eating away at personal finances, and wage growth is weak. And lenders have their hands tied by strict capital adequacy requirements and uncertainty over EU regulation like the Financial Transaction Tax, leaving them reluctant to ease criteria. Mortgage lending criteria are directly affected by the rate at which lenders can access capital. LIBOR has been falling recently. In March, six month LIBOR was 0.61%, down from 1.33% in March 2012. But income from savers has been largely eradicated by low interest rates. And lower LIBOR isn’t enough to make up the shortfall.
And to tighten the screw further, major banks will have to hold at least 7% capital of their entire risk-weighted assets by the end of 2013. The Financial Policy Committee has ordered banks to increase their capital holdings, in accordance with standards defined in Basel III. For some, bank surcharges and capital conservation buffers will raise this figure further.
So Funding for Lending is largely being overwhelmed and subsumed by problems in the wider economy, and overbearing regulation which is coming too thickly too soon.
Rising House Prices
Rising house prices are the salt in the wound for prospective first-time buyers. House prices are rising far more quickly than wages. With soaring living costs, and critically low savings rates, buyers just aren’t able to save. House prices for first-time buyers rose 0.9% to £134,616 in December, accounting for 83.9% of their average annual salary. This was a rise of 3.2% from 80.7% a year earlier.
And Help to Buy won’t make property more affordable. In the recent budget, George Osborne announced a re-vamping of the £3.5 billion scheme aiming to help struggling buyers. Whereas the old scheme was only open to those with a joint income of less than £60,000, income is now unlimited, and if buyers can put up a 5% deposit on a house, the government will put up 20%, allowing a 75% LTV mortgage to be accessed for any buyer looking to buy a house under the value of £600,000.
It will help some buyers – but it’s only drop in the ocean stuff – and at a macro-economic level it may inflate house prices and make life even harder for the majority of first-time buyers.
With savings rates low, inflation high and mortgage criteria strict, plenty of potential buyers feel they shouldn’t even bother trying to get a house purchase mortgage yet. No wonder many potential homebuyers are trying to pay off their debts, rather than move home. February marked the second consecutive month where homeowners paid back more than they took out. Homeowners paid back £8.17 billion in February, but only took on loans of £7.8 billion, according to the British Banker’s Association. This equated to a net repayment of £65 million.
For low rates and a wider range of mortgages to have a significant impact, they need to be accessible to more than just the few.
