Mortgage shortage for first-time buyers 'remains'

Estate agent's window Many mortgages remain out of reach for would-be first-time buyers

Banks and building societies are continuing to ration mortgages despite having access to cheaper funds through a new scheme, figures have shown.

The data reveals that there has been little movement in the availability of mortgages for potential borrowers who are unable to offer a large deposit.

Brokers say that, for those who have a large enough deposit, lenders have been dropping mortgage interest rates.

But there are few signs yet of things becoming easier for first-time buyers.

Cheaper mortgages

More than two-thirds of the mortgage products available on the market in the UK at the start of November required a deposit of at least 20%, according to figures from financial information service Moneyfacts.

The proportion has changed little since a month earlier. The same can be said for the relatively low levels of mortgages available for those offering a deposit of 10% of a property's value or less.

This is despite lenders having greater access to cheaper funds through the Funding for Lending scheme, run by the Bank of England.

Ray Boulger, of mortgage brokers John Charcol, said the scheme had prompted lenders to drop their interest rates on some new mortgage deals, but it had not yet led to lenders relaxing their requirements for high deposits.

How Funding for Lending works

  • Banks and building societies can initially borrow Treasury bills up to 5% of the amount they currently lend
  • They will be charged just 0.25% interest, much lower than the going rate
  • They can borrow more than 5%, only if they increase their overall lending
  • If they decrease lending, the interest rate will increase up to 1.5%
  • The banks use the Treasury bills as backing to buy money cheaply on the financial markets. It is this money that they then lend out
  • The Bank of England and taxpayers will be protected from any losses made on the loans agreed by the banks with homes or firms, because the banks will have to provide collateral to the Bank of England of a higher value than the loans
  • Lending levels are monitored by the Bank of England

"There are now several lenders who are offering five-year fixed deals, at interest rates of less than 3%, but for people with a 40% deposits," he said.

"There have been rate reductions for people seeking a deal with just a 10% or 15% deposit. But what hasn't happened is lenders loosening their criteria, so that people who did not qualify for a mortgage three months ago can do so now."

'Early days'

Mortgage rationing has been in effect since 2008 when lenders realised they had to start building up their reserves to withstand further financial crises.

They also started to fear that big falls in house prices might undermine the security of the mortgages they had already granted to people with very small deposits, or even no deposits at all.

Some £60bn is available for banks to borrow in the first phase of the Funding for Lending scheme, which began on 1 August.

The Treasury has said the scheme has started well, and one Bank of England director said the scheme would ease the decline in credit that would have occurred otherwise.

Andrew Montlake, of mortgage broker Coreco, said that lenders would first tend to change the requirements for the less risky mortgages as the access to funds started to feed through.

"It is still relatively early days for Funding for Lending," he said.

But he said there were some signs that things might start to change for first-time buyers over the next few months.

He said many lenders had paused for thought while new rules for mortgage lending were being considered by the City watchdog, the Financial Services Authority. These rules have now been announced.

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