Mortgage rate DOUBLES if you don’t pay big deposit

| July 22, 2012 | 0 Comments

By
Stephen Womack

15:56 EST, 21 July 2012

|

15:56 EST, 21 July 2012

Homebuyers are facing a two-tier mortgage market, with a growing gap between those lucky enough to be able to put down substantial deposits and those that can’t.

Borrowers with deposits of five or ten per cent of a property’s value can find themselves paying more than double the mortgage interest of those with 30 to 40 per cent equity in the property.

A homebuyer with a 40 per cent deposit who needs to borrow £150,000 will pay about £300 a month less than a customer borrowing the same sum but pushing their ‘loan to value’ to the maximum 95 per cent.

Jonathan and Sarah Michel took advantage of the NewBuy scheme to buy a flat

Amazed: Jonathan and Sarah Michel took advantage of the NewBuy scheme to buy a flat

The gap between have lots and have nots was stretched further last Friday with the launch of a five-year fixed-rate mortgage by Santander at 2.99 per cent. This matches a mortgage launched two weeks ago by HSBC. Both are available only for loans worth up to  60 per cent of the home’s value.

Lenders have always charged more for low-deposit mortgages as they face a higher risk of losses if house prices slump. But Ray Boulger, of national broker John Charcol, says: ‘The gap has been widening in recent months.’

Cheaper borrowing by the banks means they can offer lower interest rates, but only to their low-risk  customers.

Boulger says the level of reserves that lenders have to set aside for low-deposit mortgages is another factor keeping the gap between rates high.

‘The bigger gap between low and high deposits is here to stay because of new capital rules,’ he says.

A 95 per cent mortgage requires about one fifth more capital placed into reserves than an 80 per cent loan of the same size. Put another way, a firm can make six loans to those with a 20 per cent deposit for every five loans to those with a  five per cent deposit.

David Hollingworth of mortgage broker London Country, in Bath, Somerset says: ‘Many borrowers are now stuck paying their lenders’ standard variable rate because there is no realistic alternative that they can remortgage to with their modest deposit.’

The need for big deposits is also depressing the overall housing market. Almost six in ten adults say the lack of deposit is the biggest barrier to buying a house, according to a study by Halifax published last week.

The latest national housing survey, published by the Government earlier this month, found that only one in four would-be buyers who considered applying for a mortgage actually did so. The rest gave up because they did not think they had a big enough deposit.

How mortgage costs rise as deposits fall

Hollingworth says: ‘It can be a barrier not just to first time buyers, but to second and even third- time buyers who have seen the value of equity in their home eroded by falling prices.’

Some buyers, such as Sarah and Jonathan Michel, have turned to special schemes to get on the housing ladder.

The couple moved into their new two-bedroom flat in Ashford, Kent, earlier this month through the  Government-backed NewBuy scheme, which allows buyers to purchase a newly built home with a deposit of just five per cent.  Lenders are willing to offer loans because the property builder and the Government agree to share some of the risk.

Sarah, 27, is a cardiac nurse, while Jonathan, 29, is a biomedical scientist working at the same hospital. The couple, who married in 2010, were living with Sarah’s family while trying to save for a deposit.

Jonathan says: ‘Buying this year just wasn’t on our radar until we heard about NewBuy. We fell in love with this place and were amazed to find it was within our financial reach.’ The couple put down a £6,250 deposit towards the £124,995 purchase price. The rest was funded on a NewBuy mortgage from Santander at a fixed rate of 5.49 per cent for three years.

Jonathan says: ‘We got the keys for the flat on my birthday and it was a fantastic present.’

There are 18 building firms participating in the NewBuy scheme and another dozen that are working towards signing up. Halifax, NatWest, Nationwide Building Society and Woolwich also offer NewBuy loans.

NewBuy operates only in England. A similar scheme in Scotland called MI New Home is due to be launched in September.

How mum and dad can help, without losing control of their money

Many first or even second-time buyers rely on parents to help out when they are trying to buy or move home.

The simplest way for parents to help is to gift money to children so they can boost their deposit or cover moving costs.

One third of parents with adult children have given money to get them started on the property ladder, with the average contribution at £12,846, according to research from Halifax.

But not all parents are willing or able to hand over such sums with no strings attached.

Some worry they may need the savings themselves when they retire. Others fear that a break-up in their child’s relationship could leave some of their gift in the hands of a former partner.

But there are deals allowing mum and dad to help out while still keeping control of their money.
Market Harborough Building Society’s Family Deposit mortgage combines the home buyer’s deposit, which must be at least five per cent, with savings from parents or other relatives. The combination of savings and deposit must equal one quarter of the property’s value.

The savings earn interest but must be locked into a special account for five years. The society has a charge on the savings and if there is a loss on the mortgage it can dip into the savings.  However, in return, the borrower gets a 1.5 percentage point discount on the society’s variable rate. Currently they would pay 3.99 per cent.

Lloyds TSB has a similar Lend a Hand loan available through its branches. Again it allows parental savings to count towards a deposit of 25 per cent. Through the scheme someone could borrow at 4.29 per cent fixed for three years, compared with 6.29 per cent for a standard buyer with a ten per cent deposit.

Families can also work together through offset deals, which allow them to set parental savings against a child’s mortgage. This reduces the monthly interest charge on the loan, although the saver earns no interest on their money either. But savers can access the cash at any time.

The Yorkshire, Marsden and Market Harborough building societies all have family offset loans.

Here’s what other readers have said. Why not add your thoughts,
or debate this issue live on our message boards.

The comments below have not been moderated.

“Jonathan and Sarah Michel took advantage of the NewBuy scheme to buy a flat ”
should read
“Builder and bank took advantage of the naivety of Jonathan and Sarah Miche, by pushing the NewBuy scheme”.

“£124,995 purchase price”. Must have been conned into thinking that they had got a bargain as the salesman grinned and told them that they wouldn’t have to pay stamp duty!

“Jonathan says: ‘Buying this year just wasn’t on our radar until we heard about NewBuy. We fell in love with this place and were amazed to find it was within our financial reach.’ The couple put down a £6,250 deposit towards the £124,995 purchase price. The rest was funded on a NewBuy mortgage from Santander at a fixed rate of 5.49 per cent for three years.” Did they consider what happens in three years time when they are in massive negative equity and try to re-mortage?

There are masses of unsold flats on the builders books. They can’t even give them to social landlords as they are too small to meet their strict mandates for acceptable housing. Just like the offers at the supermarket, it will be BOGOF or virtually everything thrown in, to unload them and clear their debts soon, as UK and bank borrowing becomes more expensive and is passed on to the builders, who will be crippled by their debts if they don’t unload them!

£124,995 purchase price for a two-bedroom flat – what were they thinking of?

As ever the kids of poor parents are shafted. Moral is if you have no money don’t have kids as they will always be slaves to the kids with rich parents.

Dont spend that 40% deposit on a house. Not yet anyway. Newbuy,homebuy,partbuy,builderbuy etc Its blatantly obvious these schemes only benefit the people who thought them up. If you have recently bought a house using one of these schemes im guessing you get your news on whats happening to our economy from the mainstream media. The financial blogs will tell you the real state of our economy.

“Jonathan and Sarah Michel took advantage of the NewBuy scheme to buy a flat ” – Fools!

Round my way you can buy a pretty poor 2 bed flat for £150k, according to these figures this will cost a FTB £990 per month, you can rent the same for around £650 with no extra hassles.

Round my way you can buy a pretty poor 2 bed flat for £150k, according to these figures this will cost a FTB £990 per month, you can rent the same for around £650 with no extra hassles.

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