Mortgage lenders ignoring first-time buyers

First-time buyers are increasingly being presented with fewer options when searching for mortgages for house purchase as lenders continue being jittery in light of the economic climate.

Research by financial services firm Moneyfacts found that despite a 4.35 per cent fall in the cost of funding for lenders, they are yet to pass on the benefits to borrowers.

According to the organisation, in spite of the aforementioned percentage drop in cost for mortgage providers, consumers with a ten per cent deposit have only experienced a 0.12 percentage fall in the average mortgage rate.

On the other hand, consumers who can afford a 40 per cent deposit are enjoying a 1.86 per cent decrease in the average mortgage rate, which is equivalent to a reduction of £165 per month, from £998 to £833, for a two-year deal on a £150,000 mortgage.

Those borrowing an identical sum, but with a ten per cent deposit, will only benefit from a monthly repayment fall of £11 from £988 to £977.

According to Michelle Slade, spokesperson at Moneyfacts, first-time buyers, who were once a vital source of income for the property market, seem to have been abandoned by lenders in favour of carefully-selected lower-risk borrowers.

She said: "A higher margin for risk is expected on a 90 per cent loan-to-value (LTV) deal, but a 4.25 per cent margin over the cost of funding seems excessive and difficult to justify.

"Two years ago, rate-driven competition led to 90 per cent LTV deals being some of the most attractive rates on the market. Today, a 25 per cent deposit remains the level where most lenders are willing to do business. Anything smaller than this and borrowers will pay a hefty price."

Ms Slade went on to state that people looking for new deals are facing steep charges apparently being used to "subsidise existing customers, many of which are paying record low rates".

The revelations come as figures from the Council of Mortgage Lenders (CML) show that gross mortgage lending declined by 13 per cent in August compared to July, although a seasonal drop during the month is typical.

An estimated £12.6 billion in loans was provided by lenders compared to July's total of £14.5 billion and August 2008's total of £19.9 billion, representing a 37 per cent year-on-year decline.

However, underlying levels of lending appeared to have steadied during the summer, according to the CML, which said that there was "stronger lending for house purchase balanced by lower levels of remortgaging".

CML economist Paul Samter commented that "the likelihood of a significant pick-up in lending remains weak, but the prospects for wholesale funding markets are improving".

He explained that "this could result in a gradual easing in constraints on the supply of funding over time", although consumer demand and lenders being picky could still hamper the market.