The news that mortgage providers are reducing the rate of borrowing should be welcomed by first-time buyers. But be warned, unless you’ve a hefty deposit, you’re unlikely to be best placed to take advantage.
In July the government launched its Funding for Lending Scheme, designed to increase mortgage lending and loans to small businesses. The scheme works by incentivising banks and building societies to borrow at a lower cost. The more they lend, the more low cost credit they can borrow from the Bank of England, and the lower the rate of interest they are charged.
However, the scheme has already come under fire from experts for not reaching first time buyers struggling to get on the housing market.
Competing for customers with big deposits
Coupled with record low borrowing rates between banks, mortgage providers have recently been battling it out to offer some of the most competitive fixed rate deals on the market. The very best are typically available to customers with at least a 40% deposit. Not a problem for those with tens of thousands in the bank but not particularly helpful if you’re just starting out.
For prospective first time buyers with a smaller deposit the disparity in cost can significantly affect your finances. You could end up paying twice the amount in charges between a 95% loan to value (LTV) and a better value 60% LTV mortgage.
HSBC offers one of the cheapest overall deals on the market at 3.29% over the initial period. If you’re purchasing a £200,000 property it would cost you £36,174 over the first five years but you’d need a 40% deposit – a whopping £80,000 – to take advantage of the deal.
Small depositors may pay double in charges
Now the cheapest non-Newbuy mortgage you could get with a 5% deposit for the same property would be from Leeds BS offering 6.23% initial rate. You’d pay £1,198 in fees and this deal would cost you twice the HSBC deal at £77,531.
So, do you think the current mortgage market is fair on consumers? Is it right that those with bigger depositors get better rates or do you think those with limited deposit funds should be the ones helped on to the ladder?
It is understandable that mortgage lenders should be cautious lending to customers that are higher risk, however given that Libor is currently at a record low and the government is keen to kick start the housing market by investing more money into the economy, is it time mortgage lenders offer more favourable rates to those that need it most?