The market has been abuzz with stories about product withdrawals since the credit crunch began and if a peak had to be identified, it would have been the goings on of the past few weeks.
With 125 per cent loan-to-value (LTV) products pulled by the likes of Alliance & Leicester, Northern Rock and Godiva Mortgages, 100 per cent loans were the next to go with Bradford & Bingley and RBS withdrawing their product offerings.
While the lenders in question gave various reasons for their need to exit the market, the biggest dilemma is that first-time buyers (FTBs) may be left with no viable options when it comes to finding an initial mortgage product with which to buy their first property.
Viable options
The 100 per cent market was developed to help FTBs access mortgage products without the need for sizeable deposits. This effectively meant they could buy their first home with a mortgage large enough to cover the full value of the property and only have to pay legal fees and Stamp Duty.
This naturally appealed to younger FTBs and students in rented accomodation who may not have had access to the funds required in order to put down a suitable deposit, and allowed them to make their first house purchase.
The 125 per cent proposition gave a little more help, with a 100 per cent mortgage offered alongside a secured loan for the borrower to use to decorate and furnish their new home.
Alternatively they could look at using the extra funds to pay off existing unsecured debt or secure their own financial future.
With this in mind, has this series of withdrawals caused a major disaster within the FTB market, ensuring that they do not have any viable options when looking for a mortgage?
Back to traditional methods
According to Colin Franklin, managing director of Godiva Mortgages, this has left FTBs with no decent first mortgage option other than saving and borrowing in the traditional fashion.
He claimed that Godiva Mortgages’ reason for withdrawing its 125 per cent home loan product was because it was not a viable deal to continue to offer to the market, with only 2 per cent of its overall business taken up by its 125 per cent offering.
Franklin said: “The products have gone and FTBs are now encouraged to save for deposits more than they would have in the past. The amount of FTBs in the market has declined and our lending has been less than 10 per cent to the sector.
So even with the choice there was not a massive amount of growth. FTBs won’t have the option to borrow without a deposit and I suppose that is turning the clock back.”
Mark Gordon, head of product development at Platform, believes that rather than damaging the market with a lack of available options, the withdrawals would benefit FTBs as they discourage adverse lending and excessive borrowing.
He says: “It could be argued that 125 per cent deals are right on the edge of responsible lending. After all, starting off life on the housing ladder with 25 per cent negative equity isn’t an attractive position to be in.
"That said, in some circumstances, it might make sense for lenders and, more importantly, some customers. For instance, young professional people with a strong likelihood of significant short-term salary increases and little or no cash in the bank for a deposit may struggle to afford repayments.”
Furthermore, Gordon argues that the withdrawals could set the market back but that other benefits for FTBs would flourish. He explains: “Understandably at the moment times are tough for FTBs but the fact that the market is very competitive means this can only bring with it some great deals and innovative products.
"Just because the door has shut on 125 per cent deals doesn’t mean all doors are shut for FTBs, only that time is required to save for a deposit.”
Confidence is essential in bringing about change
Steve Cox, operations director of Spicerhaart Financial Services, also believes that the level of withdrawals has harmed the FTB market.
He comments: “In the time leading up to the crunch there was an increase every month in people taking out mortgages with the LTV above 95 per cent. However, since August 2007 and the credit crunch, this number has steadily fallen.
"Borrowers are finding higher deposits to put into their homes, signalling not only that consumers are confident in investing an increasing amount of equity into property but that lending has become more responsible.”
However, Cox claims that a drop in LTV and a cut in the Base Rate may encourage FTBs on to the property ladder.
He says: “When looking at this drop in high LTV mortgages, it is interesting to note the increase in FTBs. Those just starting on the property ladder have been encouraged by the drop in the Base Rate but have not been put off by the need to put down a larger deposit. It is this sort of confidence which is essential to re-ignite the property market.”
So from another perspective, could the removal of 100 per cent mortgages prove to be a good thing? If FTBs are no longer getting the opportunity to take out one of these loans will they avoid the possibility of monthly repayments over £1,000 a month? Or is it a case of getting whatever is available?
Adrian Coles, director-general of the Building Society Association (BSA), believes it is the monthly repayments which pose the largest issue for FTBs.
He says: “It is no surprise that with the average house price being almost £220,000, raising a deposit is such a barrier for FTBs. Even a 10 per cent deposit necessitates saving over £20,000 – a sum out of reach for many potential buyers who have no existing housing equity.”
Waiting for the market to correct itself
So what are the best options for FTBs? Is there a viable option for them to utilise to enter the market, or is the new buyer going to have to face the fact that a mortgage is not going to be an option for them unless they have a sizeable deposit?
Like the rest of the mortgage market, it is a case of waiting for the market to correct itself before we can expect to see anything resembling a ‘challenging’ product to be launched. Perhaps we should look to congratulate lenders for continuing to offer such products for six months after the credit crunch hit.
Dale Jannels, sales and marketing director at AToM, says: “I would say that FTBs now have an uphill struggle. With no positive FTB products on the market for those with little or no deposit, this market is surely on the decrease.
"Add this to increasing rental payments for a buoyant buy-to-let market, this leaves little or no room for a FTB to save a deposit.
“In short, if a FTB can show payment history of £800 per month rent, consecutively and on time for a period of months or years, then why shouldn’t they be able to achieve a mortgage with the same payment, no matter what their income?
"The reality is that an £800 monthly mortgage payment equates to approximately £160,000 mortgage loan – based on interest only – which, if they are a sole buyer, means they would need to show an income of £40,000, or even higher if a repayment deal. How many FTBs are able to do that?”
Making a move
Where the market can go and when it will pick up in order to offer FTBs a buying option is hard to identify during this period of uncertainty.
The fact that we have seen products launched since the New Year does raise some confidence but these continue to be in the prime sector. Add to that some lenders slashing their LTV back to 75-80 per cent; it still leaves FTBs with a distinct lack of choice.
In conclusion, Franklin says: “It stands to reason that FTBs will have to supply a deposit and not borrow from other sources. There are ways in which lenders are helping FTBs and I hope others do the same.”
So it looks like the best, and arguably only, option for FTBs is to start putting money away and wait until the time is right before they can make their move into home ownership.
For the housing market it means that a generation of new home owners will be delayed and former students will be forced to save along with paying debts.
Perhaps the next wave of home owners will be in their late 20s, having got a job straight from school and having saved for many years. This generation is likely to be small, but lenders could be seeing this as the next set of mortgage applicants.
