Mortgages: how to get a loan as lenders pull up the ladder

The Bank of England is preparing for another interest rate cut, which would put already historically low rates into negative territory. But for first-time buyers, the reverse is true and mortgage rates are rising. To make matters worse, some lenders have introduced restrictions against mortgages on flats as they worry about price falls.

Before the coronavirus pandemic struck, loans for first-time buyers were plentiful, with many banks willing to advance as much as 95% of the purchase price and the best deals carrying an interest rate of only 2.6% a year.

Now, the low-deposit 95% deals have disappeared and there are only a few lenders willing to advance 90% of the price of a home. Nationwide is the only major lender still offering loans to first-time buyers with a 10% deposit – but the interest rate is 3.49% for two years.

In contrast, for borrowers with a 40% deposit the society is offering a two-year fixed rate at 1.74%.

Coventry building society has been coming and going from the market, offering 90% deals for two days at a time to manage demand. Its last offering was a five-year fixed rate of 3.45% with a fee of £999. And Accord, part of Yorkshire building society, has been charging a similar rate on the deals it has been offering off and on throughout the autumn.

Chris Sykes, a mortgage broker at Private Finance, says: “The housing market is full of mixed messages at the moment, huge demand for property and rising prices, yet lenders remain, and are increasingly, cautious.

“To achieve low mortgage rates you either need a significant deposit or significant equity in your home – at least 25% and ideally 40%-plus, such is lenders’ fear that prices could fall significantly in the coming months.”

The new restrictions
Nationwide has introduced a strict set of conditions if a buyer wants to qualify for a low-deposit mortgage, even at the 3.49% interest rate. Other lenders who are dipping in and out of the market are making similar demands.

• Flats banned – if you only have a 10% deposit, then Nationwide says no to flats. You have to put down at least 15% of the purchase price.

• No new-build – if it is a newly built home you have set your heart on, you will need a 15% deposit, rising to 25% for a new-build flat, says Nationwide (apart from loans under the government’s help-to-buy scheme).

• Maximum 25-year term – don’t assume you can repay over 30 or even 40 years, which was common before the pandemic. A 10% deposit mortgage from Nationwide can only be repaid over a maximum of 25 years, making monthly payments more expensive.

The restrictions have been introduced as lenders seek to protect themselves against price falls when the furlough scheme ends and unemployment rises further.

“In periods of uncertainty we tend to see the values of flats fall at a sharper rate than houses,” says Nationwide, adding that prices of new-build properties “may fall further than on older properties”.

The best deals for buyers with 10% deposits
Apart from the restricted Nationwide deal, Virgin Money (which absorbed Northern Rock) will lend you money at 3.79% – but only if you are prepared to take out a seven-year fix. If you quit the mortgage before then, you are landed with potentially hefty early repayment charges.

Metro Bank has a five-year fix at 3.99% and TSB is worth trying as it is “in and out of the 10% deposit market”, according to brokers. Some building societies have 10% deals available but open to local residents only, such as the Cumberland.

The best deals for buyers with 15% deposits

This is where you start finding decent deals. According to Moneyfacts, of the major high street names, HSBC and TSB are offering first-time buyers with a 15% deposit two-year fixed rates at 2.84%, while NatWest has a deal at 2.94%. Yorkshire building society is one of the cheapest at 2.55% for a two-year fix.

AIB, Ulster and Yorkshire have the cheapest three- and five-year fixed-rate deals.

Furloughed? Self-employed?
Even in “normal” times the self-employed must have a minimum two-year track record of accounts to prove their income and now banks and building societies are being even pickier. “The lenders will be looking closely at business bank statements,” says David Hollingworth of the brokers L&C.

If you have been furloughed, Hollingworth says lenders were initially supportive but “we’re coming to the end of that scheme and there will be an expectation that the potential borrower will be firmly back on track”.

Approval times are worsening
Staff at banks are working from home and mortgage application times have lengthened. Some local authorities are also taking longer to do searches. It is taking four to five weeks to process a mortgage application, compared with two to three weeks before the pandemic.

Valuations are all over the place
Will the valuer working on behalf of the mortgage company be happy with the price you have offered? “It’s very much the luck of the draw at the moment,” says Sykes, citing one case where the buyer had offered £700,000 but the valuation came through at £550,000.

There’s still help-to-buy

Help-to-buy is a government scheme that has so far helped almost 275,000 buyers get a property with a 5% deposit. The government lends you up to 20%, or 40% if you live in London, of the price and you borrow the rest (up to 75%, or 55% if you live in London) from a mortgage lender, on a repayment basis.

The current scheme will run out on 31 March 2021 but will be replaced with a new scheme running until 2023, which will be largely the same but with regional price caps.