Cheap Loans May Not Help Some Borrowers

by Mark Johnston

The biggest weapon a first time buyer can have is knowledge. Whether this is about the home buying process, an awareness of what is going on in the property market or an understanding of the current mortgage market.

Experts have warned that many young buyers will continue to struggle this year. Last year the number of mortgages approved dropped by a third compared with figures from 2006, and it is predicted that this year will be much the same.

Banks and building societies have promised to improve the number of cheap deals, especially for first time buyers. In the last 2 years alone the number of deals available to those with a 10% deposit has increased from just 114 to 332.

The Bank of England recently stayed “lenders expect the availability of secured credit to households to increase slightly”.

With the average 2 year fixed rate for these deals being 5.51%, compared with 6.10% a year ago and 6.48% 2 years ago.

However, even with these figures many mortgage brokers estimate that around half of all buyers who have 10% deposit are still refused a loan.

David Hollingworth, of mortgage brokers London and Country suggested that “when looking at the lowest rates on the market it sometimes appears that all mortgages carry fees of at least £1,000 or more”.

Therefore many mortgage lenders are now trying to entice potential borrowers with fee free mortgage deals. High street lenders who are trying to ‘lure’ borrowers include Halifax building society who offer fee free mortgages with the added incentive of £500 cashback and Nationwide building society that have £500 off fees for those with a 5% deposit, providing they have saved with them for at least 6 months.

Although these deals might initially sound good when compared to products that come with a £2,000 price tag it is still worth doing the sums before actually signing up for them.

When borrowers compare deals they need to work out the total cost over the length of ant tied in period, as it does not necessarily mean that the fee free deal will be cheaper than the deal with the fee attached.

Some experts suggest that ‘on paper’ the fee free deal might look extremely attractive, but dig a little deeper and it may not suit all borrowers needs.

It also seems that low deposit mortgage deals are back on the market for first time buyers. Aaron Strutt, adviser at brokers Trinity Financial suggests “lenders have been offering more low deposit mortgages. However, borrowers still need an excellent credit score to qualify”.

There is concern in the financial industry that the possible surge in 95% loan to value deals (LTV) could potentially lead to lending spiralling out of control as it did in the lead up to the financial crisis.

Therefore some experts believe that lenders still need to be very cautious in assessing the ability of a borrower to repay a loan.

Bernard Clarke, from the Council of Mortgage Lenders has stated “credit checks will be stringent to make sure that lending does not spiral again” he added “the safety net needs to work on both sides”.

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