Although 100% mortgage lending for first time buyers is either a log way away from ever happening again or will never happen again, 90% mortgages have typically been considered the route to home ownership for many.
Despite the existence of 90% mortgages the number of options have been greatly reduced by the financial crisis, partly due to some lenders removing themselves from high LTV lending practices or closing their doors to new lending altogether but also due to lenders ‘cherry picking’ customers despite offering deals which attract a large number of enquiries.
But lenders should see an opportunity arising.
A recent report by Ernst & Young Item Club suggests house prices are likely to fall in 2010 but return to their former 2007 highs within 5 years.
Another report suggests house prices could continue to fall for 3 years.
With that in mind, any first time buyers getting on the property ladder now should consider a 5 year fixed rate so that even if prices do go down and then climb again to their former highs, there should be no risk of negative equity when the fixed rate offer expires and it’s time to remortgage.
If predictions are correct, consider the following:
(figures from Housepricecrash.co.uk)
Average house price now = £154,066
High of 2007 = £189,316
New purchase made now with 10% deposit = £138,660 mortgage & £15,406 equity (deposit).
If house prices increase to their former 2007 levels in 5 years (using an interest only mortgage as an example) = £138,660 mortgage & £50,656 equity.
That’s an increase in equity of £35,250 (more if the mortgage is repayment).
Not bad just for 5 years of home ownership.
What’s more, in July 2007 the average swap rate (the cost of money to lenders) was 4.013% for 5 year terms but currently stands at just 3.4% (http://www.swap-rates.com), Libor was hovering around 6% in July 2007 but is currently only 0.55% (http://www.bbalibor.com) and mortgage rates were slightly lower than they are now (for 5 year fixed deals).
What this means is lenders stand to make more money now than they did at the peak of the boom in 2007 for the same type of business.
First time buyers with a 5 year plan could help stabilise the market, prevent a further acute decline in house prices and even boost bank & building society profits.
All we need now is for lenders to crunch the numbers and broaden their range of offers to first time buyers.
Or perhaps the emergence of some new lenders?