Feel sorry for first-time buyers

Buyer interest is up but it isn't translating into sales, as mortgage finance for borrowers with small deposits remains restricted.

According to the Royal Institution of Chartered Surveyors (RICS), new buyer enquiries in February rose at their fastest rate since August 2006, and for the fourth consecutive month.

January and February are traditionally busy times, as aspiring first-time buyers look for homes in the New Year. And record low interest rates combined with declining house prices may have made people think that the time is right to get onto the housing ladder.

So could this be the beginning of the end of the housing slump?

Well, no, probably not.

This increased interest is not translating into sales, say RICS, with newly agreed sales and completed sales both falling back during last month. This is supported by the latest Council of Mortgage Lenders' data which reported that in January just 23,400 loans for house purchase were completed, down from 48,600 in January 2008 - a drop of 52%.

First-time buyer loans show a similarly bleak picture -- just 8,900 loans were made to first-time buyers, down from 18,000 in January 2008 -- a drop of 51%.

What is putting people off buying?

Fear (or hope) of further price falls and fear of job loss are two major factors why people are holding off. Falling prices in particular mean that many potential buyers feel there is no need to rush to make an offer as, for the first time in years, prices are not spiralling out of reach. Indeed, I've been holding off for the last year and can now afford to live in an area I couldn't have considered just last March.

But by far the biggest stumbling block for those who want to make that first step onto the housing ladder is the lack of available mortgage finance for borrowers with small deposits.

Of those first-time buyers that did take out homeloan in January, the average loan-to-value ratio was down to 76%, from 89% a year ago. In other words they were putting down average deposits of 24%. This is partly a result of falling prices but mainly because of restrictive lending criteria.

Getting better?

It seems like every day a mortgage lender or the Government pledges to do more to help first-time buyers make that all-important first step. Problem is, first-time buyers don't need pledges - they need competitive mortgage deals. And there is a very poor choice of deals available to borrowers with 10% deposits (known as 90% LTV deals), making it difficult and expensive for first-time buyers to find mortgage finance.

According to financial data provider Moneyfacts, as of Friday 13th March there were just 77 90% LTV mortgages available, compared with 852 a year ago. Borrowers with just 5% deposits get to choose from only three deals, compared to 530 last March.

However, this week part-government-owned lender RBS made a pledge that should at least help aspiring Scottish borrowers. The lender said it would make available £1.7bn worth of new mortgage lending in Scotland in 2009, including lending up to 90% LTV.

The announcement comes a fortnight after RBS, Lloyds TSB and Northern Rock were strong-armed into making lending pledges for 2009 and 2010, to ensure availability of mortgage finance across the UK. Northern Rock doesn't currently offer any mortgages to borrowers with just a 10% deposit, although given its record, perhaps it's wise to steer clear.

But the housing market does need greater numbers of large lenders to operate in this low-deposit (and therefore higher risk) market, and to operate competitively.

At the moment, with deals few and far between, many borrowers might find the best deal they can get at 90% LTV comes from a small, local building society

Local heroes

This is the only good news. Many building societies are still lending mortgages to local borrowers at 90% LTV -- and rates are relatively keen. There's too many to list all the deals and they are usually restricted by either the postcode of the property or by only being accessible through local branches.

But if you live in the regions of the Chorley & District, Penrith, Dudley, Tipton & Coseley, or Progressive building societies (to name a few) it could well be worth checking out what they have to offer. Some have variable rates under 5% and fixed rates under 6%, which in the current environment is a good deal at the 90% LTV tier.

If you don't have a local lending hero on your doorstep below are some of my favourite 90% LTV deals. They are not pretty, not cheap and there are barely any variable rate deals at this LTV (and no trackers) -- but there is a decent range of fixed length terms, and a choice of fee levels from the few lenders left operating in this market.

90% mortgages

*Ecology has restricted income multiple criteria at 90% LTV

Compare mortgages at lovemoney.com

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