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First-time buyers are shut out of the property market, thanks in part to the sky-high deposits now required for a mortgage. But accounts that offer the chance to save for a deposit are no guaranteed route to getting that golden mortgage…
Do you dream of owning your own home? You aren’t alone. But if you are also young, broke and struggling to save any money, it may be hard turning that dream into a reality.
As I wrote in the blog this month, would-be buyers cannot accrue the large deposits now needed to get mortgages approved.
Current first-time buyers are suffering more than anyone and they are crucial for helping the housing market to recover. The average amount now needed for a deposit is 21% of the property’s value, up from 5-10% that was typical before the financial crisis. Those 90% and 95% loan-to-value (or LTV) mortgages – the only ones that many first-time buyers can afford – did a vanishing act in the years following the crisis and have yet to make a major comeback.
But help might be at hand. Last week, the government launched its FirstBuy scheme, which could help up to 15,000 people across the UK in its first two years, with up to £500m being available across the country.
The Firstbuy scheme is a shared equity arrangement between the government and home developers in the UK, providing would-be buyers with a 20% loan and only requiring a 5% upfront deposit.
As details trickle through, it is clear only some buyers will qualify and the availability of properties will depend on the region you live in. Also, you may need to be buying a brand new home. This can bring its own, well documented hazards. As the scheme comes to light, I will write about it and assess the various pros and cons.
So what other options are available?
Let’s look at what kind of deposit you’ll need for a 95% mortgage. The average UK first time buyer (FTB) property costs an estimated £121,717, meaning a 5% deposit would amount to £6,085. Saving around £200 each month for two and a half years would achieve this target, says the Clydesdale/Yorkshire bank.
And yes, you might guess what’s coming. The Clydesdale has now rolled out a specialist savings account to help customers build up the golden sum needed to get mortgages approved. The idea is that a generous mortgage is on offer to savers once they have amassed a 5% or 10% deposit, encouraging bank loyalty and kick-starting FTB mortgages once more.
It is one of 8 banks that have brought out “home saver accounts” which require contributions on a regular basis to qualify for attractive perks like ‘cashback’ of up to £5000, which RBS promises. But for that fabulous windfall you would need to have already saved £50,000. That is a bit unlikely, let’s face it.
Cashback is designed to encourage loyalty, as it only kicks in once the saver has reached a certain total (£2,500 at Nationwide) or applies for a mortgage (often the mortgage must actually be approved). But you might end up being tied into a future mortgage product that you might not even qualify for!
How much you pay into the account can vary – some accounts will restrict the total amount you can pay in per month and most will not allow you to dip into the savings until you meet with a mortgage advisor from the bank and the account is “drawn down” or closed.
The First Home Saver from Nottingham BS, for example, offers 95% mortgages and a return on savings of up to 3.25% plus up to £250 cashback if you then take out their mortgage.
The Clydesdale Bank Regular Home Saver account requires you to pay in at least £200 a month but has no limit, unlike many other accounts. The Nationwide Save to Buy account only requires you to pay in at least £50 a month, as does Natwest and RBS’s First Home Saver.
All these accounts are trying to bind customers to an eventual mortgage with the bank or building society. The new Nationwide scheme holds out the prospect of that rare 95% mortgage to those that have built up a deposit with the bank between six months and three years. The Nationwide’s current 95% deal is fixed for three years at 6.29% and a five-year fix is at 6.89%, both with a £999 fee, although as a Save to Buy customer you would qualify for the current offer of a £500 discount on fees for first-time buyers. Bear in mind that only putting £50 away each month won’t really cut it in terms of getting the best cashback deals and building credibly towards that 5% deposit which is, after all, almost £7,000. As for cashback, a 10% rule tends to mean that if you manage to save £2,500 you will get £250, while saving ten grand would earn you a princely £1000.
But the thing that can really matter is a decent regular interest rate. The rates on many accounts can actually be pretty lacklustre, with the Clydesdale deal only offering the Bank rate of 0.5%. RBS’s rates are similarly puny, ranging between 0.1% and 0.5%.
Moving up the table, the rates come in at 1% (NatWest) 1.03% (Yorkshire BS) 1.5% (Leeds BS) 2.5% (Nationwide and Britannia), 2.75% (Cumberland BS) up to 3.25% (Nottingham BS) and 5% (Santander).
Remember that two or three years down the road, the eventual mortgage deals on offer may not be the most competitive on the market. Clydesdale currently offers a 95% deal on a three-year fixed rate of 6.99% with a £599 arrangement fee, but Skipton BS for instance has a two-year deal at the same LTV costing only 5.99%, with no completion fee and an application fee of only £195.
Also, only those with a spotless credit history may be considered for that generous 95% loan, so many young savers might not make the cut. Santander warns that although tantalizing mortgages are on offer, not everyone is eligible for them once they come to be considered.
Perhaps getting some help from a savings ‘guarantor’ might be another answer. Lloyds TSB has been extending its Lend a Hand scheme, which allows FTBs to have their mortgage guaranteed by a parent or other family member. The buyer is offered a 95% mortgage at the market rate for a 75% loan, providing the guarantor puts up 20% in the form of savings on which the bank has a three-year security. The added incentive for the saver is that the account pays currently 4% for a three and a half year term (before dropping to 0.5% below base rate or currently nil). The scheme now also applies to home movers and has extended to a partnership with local authorities, helping those who cannot get the 20% savings required from family members.
Of course, you could choose instead to invest in ordinary savings accounts with terrific interest rates or tax-free ISAs but these aren’t without their problems. HSBC for instance offers headline grabbing rates of 8% for regular savings, but these only apply to accounts with monthly fees – unless you can invest £50,000 or earn over £100,000.
Santander has a fixed-rate Monthly Saver which pays 4% on deposits of up to £250 a month, which is topped up to 6% if you also open a current account, but the rate only lasts for 13 months.
But some standalone savings accounts and ISAs could make your funds go that little bit further. A top-paying Isa such as the AA’s Internet Access ISA gives you returns of 3.35% a year, although this includes a 1.65% bonus for one year. Many home saver accounts are only available in branch so for those that prefer to do internet banking, web-based accounts are an alluring alternative.
By the time you have accumulated decent savings in a high-interest regular saving account or tax-free ISA, who knows what the future may bring? More 95% and 90% deals could creep back onto the market and mortgage requirements could become less stringent then they are now. If so, you will have a much greater choice and can afford to decide between competitive interest rates on mortgages offered by many different banks and building societies. In any case, the more savings you can build up the better, because 90% and 95% mortgages have very high interest rates and right now, people are still being turned down for these mortgage deals at an alarming rate – Skipton admits it has turned down 3 out of 4 applications for its 95% deal.
But if you envisage only being able to afford a 5%/10% deposit the question is this. Do you want to invest in a home savers account (with so-so interest and nice cashback) that ties you to one mortgage deal? Or should you look at other saving accounts with better interest and play the field if you can build up a much more decent deposit? More favourable mortgage deals may be thin on the ground now but if you’re the eternal optimist like me, you might want to join in with Dr Brian Cox’s former band and sing “things can only better”. Take it away D:Ream…