Mortgage funding has been tight since the credit crunch. But now that banks are rebuilding their balance sheets and the government’s Funding for Lending Scheme (FLS) is gaining traction, things are changing. Some lenders are cutting rates, and many are launching new products into what has become a very competitive market.

But it’s not good news for everyone. Alan Cleary, Managing Director of Precise Mortgages, says it’s “great news if you are a borrower with a 30-40 per cent deposit because lenders are clambering all over themselves to win this business.” But for those with smaller deposits, getting a realistic mortgage might still be tough.

If you are a borrower with a 30-40% deposit, lenders are clambering all over themselves to win your business.” Alan Cleary Precise Mortgages

The FLS, launched in July 2012, is beginning to have an impact. Nationwide Chief Executive Graham Beale says, “It is having a significant impact on mortgage pricing, with very attractive rates on offer to borrowers.” But it doesn’t yet appear to have led to any loosening of criteria, either as regards buyers’ creditworthiness or the Loan to Value (LTV) required. Rate reductions have been targeted at lower LTV loans and prime customers; banks are competing hard to get prime quality, while not serving the average borrower.

John Bagshaw, Corporate Services Director at Connells Survey & Valuation, says “first time buyers are losing out as lenders keep tight mortgage criteria for the limited number of high LTV loans on the market.”

And Clare Francis, Site Editor at Moneysupermarket.com, says that even though she believes the FLS has helped the availability of mortgages for those with smaller deposits – she expects more 90 per cent products to launch in 2013 – there’s a trend to higher fees which isn’t particularly good news for first time buyers.

First time buyers are losing out as lenders keep tight mortgage criteria for the limited number of high LTV loans available.” John Bagshaw Connells Survey and Valuation

It looks rather as if anyone who hasn’t already jumped on the property ladder isn’t going to be able to. Are average families and individuals now excluded from the market?

The ‘haves’ have it

E.surv’s Mortgage Monitor for November 2012 showed home loans hitting an 11-month high, but that was mainly due to an increase in lending to wealthier buyers. First time buyers (FTB) struggled – approvals on property below £125,000 accounted for only 22 per cent of total purchase lending, the lowest for 14 months. And lending to borrowers with lower deposits slipped 33 per cent from November 2011, with only one in 11 loans made for more than 85 per cent LTV – that’s the lowest since July 2011. Prime and near-prime products are highly competitive, but in sharp contrast to pre-crunch conditions, there’s no sub-prime market worth speaking of. Lenders are maintaining tight criteria; according to anecdotal evidence from agents, even a missed mobile phone payment can lose a mortgage approval.

Buying a house has never made better sense, with rents at an all time high in many areas; Halifax said in September 2012 that the cost of buying for FTBs is £100 or more a month less than renting, but getting the finance remains a problem.

According to Paragon Mortgages’ quarterly FACT survey, FTBs accounted for just 17 per cent of the market in the third quarter of 2012. In 2007, they took out 36 per cent of all mortgages – and in 1995, as much as 50 per cent, according to figures from the Council of Mortgage Lenders (CML). That percentage has been headed downwards ever since. Even the buy to let market is now bigger than FTBs’ slice of funding, at 19 per cent of the total.

Richard Sexton, business development director at e.surv, says of recent mortgage figures that, “The slight improvement in overall lending glosses over the ongoing struggles of first time buyers.” He believes that because lenders are “mindful of their risk profile and capital adequacy requirements,” they have become highly risk-averse in their lending policy, so they prefer to use their capital to support lending to higher quality borrowers. He says “First time buyers who couldn’t qualify for a mortgage three years ago” – at the height of the crunch – “are no better off.”

It’s the deposit that deters many FTBs. According to Steve Hicks, Managing Director of finance provider Genie, the average deposit for a first time buyer in the UK currently stands at £26,000. That represents 79 per cent of annual average income. “The proportion of first time buyers requiring assistance, at 77 per cent, is at an all time high,” he says. But those who can’t borrow from the Bank of Mum and Dad (or Grandad), and aren’t able to save a large deposit, may now be excluded from the market.

What help is at hand?

E.surv’s November 2012 mortgage monitor survey shows that though the number of loans overall was up 0.5 per cent, lending to borrowers with a high loan-to-value was down a third on the previous November’s figures. The average LTV on property below £125,000 (typical first-timer property) fell to 66 per cent in November, the lowest since February 2011. On average house prices of £158,000 (according to Halifax), that would mean buyers had to find a deposit of nearly £54,000. Richard Sexton, business development director of e.surv, commented: “The slight improvement in overall lending glosses over the ongoing struggles of first-time buyers.”

That’s one reason the Gentoo Groupowned Genie has innovated with its 25 year no-deposit payment plan. But it has signed up only 49 homeowners since October 2011 – small beer in terms of the overall market. It’s doing better considering its size, though, than NewBuy, which had only signed up 250 buyers by June, despite high government hopes. Still, there’s innovation happening in the market with Castle Trust, for instance, offering partnership mortgages that work in a similar way to FirstBuy, but on resale properties.

A Building Societies Association survey on perceived barriers to entry found that the difficulty of finding a deposit was mentioned by 59 per cent of FTBs – the most common barrier identified. 46 per cent mentioned the difficulty of securing a mortgage, while only 13 per cent mentioned stamp duty and 20 per cent concern over house prices.

No wonder the Building Societies Association said recently that a quarter of potential FTBs feel they will have to save for ten years to get a deposit together. Precrunch, 69 per cent of FTBs took just three years to save up; only 45 per cent of them manage to scrape a deposit together in that time today.

According to the CML, 66 per cent of FTBs are assisted by parents or grandparents. That rises to 72 per cent in London. In other words, only just over a quarter of FTBs can manage to buy a home out of their own resources. They’re also getting older – and Richard Donnell of Hometrack expects the average age of FTBs to keep rising; it’s now around 29-30, but he believes it could hit the late 30s or even early 40s.

But there is some recent evidence that the woes of FTBs may be overstated. Building Societies Association head of Mortgage Policy, Paul Broadhead, says, “It is a complete myth that no FTBs are getting their feet onto the housing ladder.” Mutual lenders issued 22,000 FTB mortgages in the first three quarters of 2012, with one in three of their mortgages going to first time buyers, he asserts. CML figures for October showed a 14 per cent rebound in loans to FTBs, after a quiet September, and Q3 saw FTBs at their highest in London for nearly three years.

Some lenders are certainly pulling their weight. For instance, Nationwide’s lending to FTBs doubled in the first half of 2012 and reached the highest level for four years. Nationwide has an 18 per cent share of gross lending to the FTB mortgage market (against 14.4 per cent of the mortgage market as a whole), so that’s significant.

Funding for Lending is having a significant impact on mortgage pricing, with very attractive rates on offer.” Graham Beale Nationwide

And buyers with low deposits have far more choice of product than they did a couple of years ago. Moneyfacts this November counted over 300 90 per cent LTV products, the highest level in six months. By comparison, the number of such products fell to just 71 at the height of the credit crunch in May 2009.

Who’s lending now?

However despite the FLS, it’s not the major banks that are leading the market. It’s building societies and niche lenders that have come to the fore. Moneyfacts’ list of market leading FTB products includes the Britannia, Chelsea, Market Harborough, Yorkshire, Ipswich, Hanley Economic, Loughborough, Chorley & District, The Nottingham, and Leeds – some with free valuations, and some with no or low fees. Yorkshire Building Society’s Chris Smith claims it has provided about one-third more FTB mortgages in 2012 compared to 2011, with a range of competitive mortgages. Though LTV is only 85 per cent, it appreciates that most buyers will be strapped for cash, and offers £1,000 cashback, no fee, and a free valuation.

Niche lenders are also active, for instance ‘challenger bank’ Aldermore with its Family Guarantee Mortgage. This offers a 100 per cent LTV loan where a parent, step-parent or grandparent is able to provide a guarantee secured against their own property. It has also joined FirstBuy. Charles Haresnape, Managing Director of Residential Mortgages at Aldermore, said at the time, “The reason why Aldermore have decided to join the scheme is because at the moment there are only five High Street banks involved and we feel a lot of customers don’t get the deals they’re looking for.”

Few mainstream banks seem to be interested, though in November, Santander launched a variable tracker specifically aimed at FTBs, at 90 per cent LTV, up to £300,000, 4.79 per cent, with free valuation, no fee, and a £250 cash rebate. NatWest, too, is now offering a 90 per cent LTV mortgage, with no fee and a 5 year fix at 4.79 per cent.

But Paul Broadhead says it is mutual lenders who have contributed most of the net lending in the UK as banks have been shrinking their balance sheets.

Implications for estate agents

Of course it’s not just FTBs who are finding today’s market difficult. Many owner occupiers now find themselves unable to trade up; falling property prices mean they’ve not built up equity in their existing properties over the last five years, while capital repayment hasn’t yet made inroads into their mortgages, and they can’t get 85-90 per cent mortgages to bridge the gap.

The proportion of first time buyers needing parental assistance is at an all time high – currently it is 77%.” Steve Hicks Genie

There are a number of implications for estate agents. First of all, they need to be smart about qualifying applicants – possibly talking them through how to check their credit scores online, how to improve their credit record, and what, realistically, they are going to be able to afford. That all takes time – but it’s time well spent if a sale goes through, instead of being derailed at the last moment by failure to secure funding. In the boom, you could take applicants to see homes slightly above their budget level and hope they could extend their resources; now, it’s a question of encouraging them to be realistic.

Realistic valuations are also crucial. Sales regularly fall through as surveyors talk down the valuation; lenders are risk-averse, and LTVs are being strictly adhered to. There’s not much room for manoeuvre here – it’s only at the top end of the market, when dealing with cash-rich purchasers, that there’s a decent margin for error.

Mutual lenders have contributed most of the net lending in the UK as banks have been shrinking their balance sheets.” Paul Broadhead Building Societies Association

Despite signs of a thaw in the mortgage market, with more and better products available, and the reintroduction of 90 per cent and even 95 per cent LTV mortgages, life for mortgage applicants is likely to remain difficult in 2013. The market has recovered from its trough – but the way upwards will probably be long and slow, and lenders will remain choosier than they used to be.