Are first-time buyers getting a raw deal?
Banks are currently providing fixed-rate remortgage deals for struggling existing borrowers at up to 1.5% less than the range typically available to new customers with larger deposits.
While this is a welcome help for homeowners who have seen their property fall in value, pushing them into negative equity, it does pose a problem for people who want to get on the ladder.
Plus, first-time buyers are an essential part of the housing chain.
So, is offering better rates to existing borrowers fair to first-time buyers?
Yes, says Ray Boulger, senior technical manager at mortgage broker John Charcol:
It’s a sensible move, from the perspective of both the borrower and the lender. The market is very different from two years ago, and there is now a huge differential between 75% and 90% loan-to-value (LTV) lending.
That’s partly because lenders now need to set aside much more capital to cover high LTV loans.
That includes those on their books where the customer originally borrowed, say, 75% of the value of their home but the price has fallen by around 20%. In such cases, even if they have paid off some of the capital, the mortgage is now worth about 90% of the property value.
Borrowers in this situation coming to the end of their deal have few options. In the past, they could have remortgaged without much difficulty at up to 90% LTV, but it’s very different now.
Most will therefore stay put with their existing lender, either on a new deal or in many cases on the standard variable rate, because it’s currently so low that affordability isn’t a problem.
But when rates rise, as they will, they could find that they can’t afford the standard variable rate or to move onto a higher fixed rate. If they are able to switch to a manageable fixed rate now, before rates generally go up, they’ll be OK and will be able to continue to make their mortgage payments.
So by prioritising these customers’ needs, lenders are not only doing the best thing for them but also looking after their own books.
Apart from anything else, because so few remortgagers are moving to a new lender, banks are not losing customers like they used to – which means they have less need to court new business with generous headline rates.
So these better deals for existing customers may not seem fair to new borrowers, but they are prudent from the banks’ point of view.
No, says Helen Adams, founder of FirstRungNow.com:
Can’t the banks see that we need first-time buyers in order to kick-start the property market?
It’s clear that those people who are in arrears or in danger of repossession should have some assistance with their mortgage payments – perhaps extension of the repayment period or mortgage payment holidays – but just because someone is in negative equity they shouldn’t automatically need financial treatment that is preferential.
After all, many of these people started out with zero or negative equity and understood the dangers and risks.
Negative equity becomes a real problem if for some reason you need to sell up or are being repossessed because of foreclosure – which can be avoided by the lenders. For many, the drop in interest rates means there is room to overpay and save some interest.
We need first-time buyers. If we don’t help them onto the property ladder – with responsible lending – then the rest of the market will be unable to move and we will continue in this stalemate.
As things stand at the moment, only the very privileged or those who can secure help from parents can take the first step, making property ownership socially divisive.
Why not treat first-time buyers as ‘special cases’ in addition to those in arrears? All borrowers must be treated as individuals and evaluated as such, not necessarily grouped together for preferential treatment simply because they ‘fit the bill’.
The guidelines governing the giving of mortgage advice in this country dictate that borrowers should be evaluated as individuals at the outset, and this scrutiny should be applied all the way down the line.
First-time buyers mustn’t be written off but viewed as credible, long-standing lending potential.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.