First time property buyers still can’t get a break
By Damian Clarkson     30th January 2008

First time buyers (FTBs) hopeful of affording property following a dip in prices have been left dismayed by news that many lenders now expect them to stump up double the deposit.

Earlier this month, property website Rightmove announced the average asking price for property had plummeted over £11,000 – or 5% - since October.

The news prompted speculation that many prospective FTBs, long isolated from the market by rocketing house prices, would be able to make their first step onto the property ladder.

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ize does matter... with your deposits
The problem is that many of the competitive fixed rate mortgages and discount mortgages on offer just a few months ago have been pulled, making it difficult if not impossible for first-time buyers (FTBs) to get started.

Both Alliance & Leicester and Britannia, two of the nation’s largest mortgage providers, have recently hiked the minimum deposit they are willing to accept. With the average house purchased by a FTB costing in the region of £150,000, that means they have to somehow come up with an additional £7,500 if they wish to take advantage of the current dip in house prices.

The news is worse for FTBs looking for a 100% mortgage – where they don’t have to come up with any deposit at all – with 10 lenders pulling all such deals from the market in the last six months alone.

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When it rains, it pours
And as if that wasn’t making it hard enough for FTBs, the actual cost of mortgages is increasing – even though the base rate was cut in December.

Three lenders have upped the rates on their various products, most recently Nationwide which hiked its tracker mortgage range by as much as 0.15% this week.

The end result is that most FTBs are no nearer to affording a house despite the dip in property prices. So just what is going on?

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This is not a mortgage conspiracy… though it feels like it
Obviously this isn’t a conspiracy to keep FTBs off the market. Rather, all the above factors – stricter lending rules, rising mortgage rates and falling house prices – are a direct result of the credit crunch.

And with lenders still struggling to find cheap credit to offer to customers, coupled with fears of a recession and general market volatility (as witnessed by the FTSE freefall this week), it’s unlikely the prospects for FTBs is going to improve any time soon.

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The news is good for re-mortgages
For those already on the property ladder and are looking to re-mortgage, a tracker mortgage could well be the way to go. But with economists at Ernst & Young speculating that the Bank of England will cut the base rate from 5.5% to 4.75% by the end of this year, a variable rate mortgage could work out substantially cheaper than a fixed mortgage deal.

As an illustration of this, Bristol & West mortgages currently offers a two-year fix at a rate of 5.45% with a £999 fee. On a £150,000 mortgage over 20 years, repayments would be £1,027. Co-Operative Bank mortgages offer a two-year tracker with a 5.49% rate and a £999 fee. On this, monthly repayments on a £150,000 loan would be £1031.

But should rates fall to 4.75% as Ernst & Young predicts, your repayments would fall to £968 - £59 a month cheaper. Of course, the base rate has proved anything but predictable in the past, so don’t opt for a tracker mortgage – or any variable rate deal – unless you are sure you can afford it if rates head in the opposite direction instead.

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Article produced by EveryInvestor.co.uk