Northern Rock has announced it will offer first-time buyers a 90% mortgage. But this won't help a moribund market crippled by high house prices, says Jill Insley
First-time buyers who have struggled to get a mortgage have been given a glimmer of hope following the announcement that Northern Rock ? the bank owned by UK taxpayers ? is at long last offering a reasonably priced mortgage for those with a small deposit.
The bank will lend mortgages worth 90% of the property's value at a rate of 5.99% for two years, 6.49% for three years, and 6.59% for five years, with no product fee payable. Other lenders have been offering cheaper deals at a 90% loan-to-value (LTV) ratio for some time, but they tend to charge application fees of around �1,000 ? a big sum for those battling to pull a deposit together.
Readers may think this an extraordinary move for Northern Rock to make right now: the bank was pilloried for what many considered reckless lending. Its Together product, a combination of a mortgage and long-term personal loan, allowed borrowers to take out up to 125% of their property's value. These mortgages proved impossible to sell on to other lenders as economic conditions declined, forcing the bank to seek help from the government.
Moreover, house prices are falling, and expected to continue a downwards trend through the year as interest rates and unemployment increase, exposing both bank and borrowers to a greater risk of loss if the latter are unable to repay their loans.
But Northern Rock points out that it is a different bank from the one that lent the Together product, and it is approaching lending more cautiously this time. It claims to have set strict affordability criteria, requiring prospective borrowers to reveal one-off spending outlays as well as regular bills. It is also offering a 10-step guide to buying a first home, from setting a budget and choosing a property through to completion. The one off-key note is the maximum loan size of �450,000 ? frighteningly high for a first-time buyer.
The government has called repeatedly on lenders to once again start providing affordable and sensible mortgage funding for this vital section of the market. First-time buyers are traditionally regarded as the lifeblood of the housing market: all sales chains have ? until the rise of the buy-to-let investor ? started with them, and their home purchases support the economy through sales of white goods and furniture.
Yet their number plummeted by 42% year-on-year in December, according to figures released by the Council of Mortgage Lenders, leaving many to pay more in rent than they would for a mortgage on the equivalent property.
So instead of of criticising Northern Rock for offering these loans, perhaps we should really be asking why it has taken the bank so long. The fact that Northern Rock is just one of several banks now prepared to lend at 90% LTV ratios shows that mortgage lending is not really the hindrance to first-time buyers it once was.
The real elephant in the room is house prices. Although they have fallen 0.9% over the past year, according to Land Registry figures, it is not nearly enough to make property affordable for most first-time buyers. While the average salary in the UK is just �26,510, the average price of property is still more than six times that at �163,177.
Until something is done to address this disparity, prospective buyers will remain as tenants.
Source: http://www.guardian.co.uk/money/blog/2011/feb/28/northern-rock-first-time-buyer-mortgage
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