Low interest rates and a healthy property market have resulted in fierce competition among lenders to provide the most attractive mortgages. More borrowers are beginning to switch lenders in order to get the best deal and lenders know they cannot rely on long-term loyalty if their products only provide short-term value.
When it comes to first time buyers, lenders not only need to attract new customers, but also offer deals that will make borrowers resist the temptation to shop around in the future. So, how are lenders targeting first time buyers in today’s challenging market?
Because of intense competition to provide impressive deals for both new and existing borrowers, lenders are moving away from products that are developed exclusively for first time buyers. According to Ray Boulger, senior technical manager at Charcol, this does not mean first time buyers are getting a worse deal. ‘Compared with five years ago, there are relatively few first time buyer deals on the market. Whereas lenders used to see first time buyers as an area to be targeted specifically, there is now a need to target the whole market so everyone has access to the best deals. It is not that first time buyers are losing out ‘ more people are benefiting,’ says Boulger.
Nationwide is one of the many lenders that has taken a more universal approach, replacing the low rate deals that were once exclusive to first time buyers. Jennifer Stoddart, senior press officer at Nationwide, says: ‘Our new pricing strategy includes everyone because although a customer may be a first time buyer today, in a couple of years they may start seeking a more competitive deal.’
But this is not the only change that has occurred in the first time buyer market ‘ customers have changed too. The average age of first time buyers is now rising and currently stands at around 24. With more people leaving university with hefty debts, borrowers tend to be waiting longer to buy so they have time to save for the right property.
‘There has been a fall in first time buyers and the average age has increased as people live at home longer, or renting so they can save to buy a property they really want rather than the first one they see,’ says Stoddart.
It is because of the higher levels of debt already accumulated by the time people now think about buying a house that more borrowers are ignoring traditional incentives, such as free legal fees or application fee waivers, and are heading straight for the lowest rate. First time buyers are more financially astute and tend to regard low rate products, even in the short term, as highly attractive.
Emma Keens, press officer at Woolwich, says: ‘There are no hard and fast rules about which deals are the most popular with first time buyers ‘ it depends on their individual circumstances. If customers are applying for a mortgage once they are in a well paid job, they may want to pay their mortgage off as quickly as possible. But, with more first time buyers coming into the market with little spare cash due to university debts, lower rates can be more attractive as it leaves them with more cash to spend on essentials. Fewer first time buyers seem interested in benefits, such as fee waivers and would prefer the cheaper rate.’
However, some first time buyer incentives do still exist and, according to Boulger, can provide valuable benefits for borrowers. ‘A few lenders do still have some slightly better deals for first time buyers, such as free valuation and a small cashback of £250 or so. But one of the main elements I would advise them on is to avoid products where they have to buy a mortgage indemnity guarantee,’ says Boulger.
Hidden costs, such as MIG premiums, can make all the difference to borrowers buying for the first time. According to Stoddart, although the rate may be low, borrowers could end up paying more in fees than they bargained for. ‘The two benefits we have found to be of great advantage is to make products free of application fees and MIG fees. MIG premiums can amount to as much as £1,000 and application fees can stand at around £500. For customers applying for their first mortgage with little spare cash, these fees can make a difference,’ says Stoddart.
But merely increasing buying power by offering enhanced income multiples is not regarded as prudent and the majority of lenders apply their standard multiples to all borrowers, first time buyer or not. ‘Stretching income multiples is not the answer. It is in no-one’s interest to encourage people to take on a mortgage they can not afford,’ says Stoddart.
A safe option
So, what are the best products to help borrowers get their first foot on the property ladder? Boulger says the answer lies in fixed and capped rates. These products can give borrowers the extra cash they need to set up home in the first few years of their mortgage without the risk of sudden rises in interest rates.
‘One of the key problems in lending to first time buyers is agreeing on a mortgage big enough to meet their needs without stretching themselves. Fixed and capped rates are a good way of safeguarding against rates going up if money is tight,’ says Boulger.
Ian Beggs, senior press officer at Halifax, says current market conditions are favourable to first time buyers as they can take advantage of low rates both during and after the discount period. ‘Affordability is good at the moment, in fact, it is better than it has ever been in terms of the deals that are on offer. And it is not just the initial deals borrowers can benefit from ‘ ‘go to’ rates are also decreasing. Instead of reverting to the higher SVR, most products are offering low rates after the deal too,’ says Beggs.
Most high street lenders have some very competitive fixed and capped rate products on the market which, although not exclusive to first time buyers, can often provide the best value deal. Halifax, for example, offers a three-year fix at 5.85% with no arrangement fee and £250 cashback, or a two-year fix at 5.55% with an arrangement fee of £195. Nationwide has similar deals on offer, such as a five-year fix at 5.89% which refunds all fees on completion.
Some lenders are taking a different route and are offering high loan to value mortgages (LTV) in order to attract first time buyers. Halifax has recently upped its LTV to 97% to accommodate borrowers wishing to buy in property hotspots. ‘We found buyers in London and the south east were finding it increasingly difficult to put down a 5% deposit,’ says Beggs.
But other lenders have increased the stakes even further and offer 100% LTV or even higher to first time buyers. And according to Council of Mortgage Lenders’ (CML) research, 8% of first time buyers across the UK opted for a 100% mortgage last year.
Mortgage Express lends up to 102%LTV. Hema Nagar, product development manager at Mortgage Express, says lower deposits are attractive to first time buyers: ‘With house prices rising people are finding it difficult to borrow just 90%. There is a growing demand and there will always be a place for 100% mortgages in the market.’
Lenders that offer high LTVs have been the target of much criticism, with some in the industry saying such products encourage borrowers to stretch themselves unduly if rates increase. But according to Boulger, high LTVs do not pose an increased risk and are often a sensible solution for first time buyers.
‘There are many warnings about lending 100%, but the reality is that if rates do go up there would be little difference in how it would affect a 95% and a 100% LTV mortgage. 100% mortgages can often work out as less of a risk than if a borrower opts for a high deposit by taking on an additional loan. Rather than having a mixture of loans, borrowers would be better off getting a larger mortgage as there is a longer repayment period and lower rate of interest. A 100% mortgage is only a problem if the borrower cannot afford to meet repayments if a rate increase occurs,’ says Boulger.
Northern Rock also lends over the 100% mark, by offering borrowers a secured loan up to 95%LTV and an additional unsecured loan of 30%LTV. With the lender’s Together Connection product, borrowers can receive an additional credit card with a guaranteed limit of £3,000, or £5,000 if the secured loan amounts to only 90% LTV.
These products are designed to help borrowers with moving costs and buying furniture, and in the main appear to be a viable option for first time buyers. But when a large part of the loan is unsecured, borrowers undoubtedly need to take a more responsible approach so that repayments do not become a burden.
Apart from low rate, high LTV deals, a new product has recently appeared on the market targeted specifically at first time buyers. Woolwich has introduced a mortgage that allows borrowers to offset their mortgage against the savings of a friend or relative in order to lower repayments by reducing the interest being charged on the loan. According to Keens, the product, Open Plan Offset Together, is proving popular among first time buyers and it should not be too long before other lenders follow suit.
‘We found 27% of first time buyers were borrowing money for a deposit from their parents. So, we looked for a flexible approach that would allow borrowers to offset the mortgage against their parents’ savings. It is still early days, but there has been a lot of interest in the product and I would not be surprised if other lenders soon develop similar products for the market,’ says Keens.
Although the majority of lenders have reduced the amount of deals aimed at first time buyers, with new product developments the market looks set to expand. Products are becoming more flexible and just because they are open to all borrowers does not mean first time buyers will be left by the wayside. The first time buyer market provides an excellent environment for product innovation and can, in turn, provide a lucrative client base.