Competition returns to home loan market

The past few weeks have seen a number of new mortgages and rate cuts, suggesting a loosening in the market and a welcome sign that competition is returning, but what are the real implications for homeowners?

Several lenders, including Abbey, Halifax, Leeds Building Society, Northern Rock and Woolwich have recently moved to reduce mortgage rates. New and competitive products have entered the market, with the lenders offering higher loan-to-value (LTV) ratios. While this may seem good for the housing market, in reality people looking to buy their first homes or remortgage on to new deals will still find conditions difficult.

"The nearest we have come to a price war in a long time has broken out in the mortgage market," says Melanie Bien, a director of mortgage broker Savills Private Finance. "A number of lenders have reduced fixes and trackers, with Rock leading the way."

Aggressive pricing from Northern Rock has driven the market over the past month and currently offers some of the best rates after cutting its rates for the fourth time in a little over a month. The nationalised bank shaved 0.1 per cent off its two-year tracker, with 70 per cent LTV and a £595 fee, making it a best buy at 2.59 per cent. It also launched a range of tracker products, allowing new buyers to borrow up to 80 per cent of their homes' values.

Abbey reactied to Northern Rock's strong position last week by offering existing Abbey and Alliance & Leicester current-account customers a range of mortgage deals at lower rates. Among the new loans on offer are a market-leading three-year, fixed-rate loan at 5.99 per cent, with 90 per cent LTV and no fee – but this is for purchase only. Abbey also offers a three-year tracker mortgage at 2.99 per cent with 75 per cent LTV, available for purchase and remortgage customers.

Next up, Woolwich introduced a 75 per cent LTV range for the first time since autumn last year. The range includes a two-year fixed rate at 3.99 per cent and a lifetime tracker at 2.94 per cent. The lender also reduced its 70 per cent LTV tracker from 2.79 per cent to 2.77 per cent. The next day, Leeds BS launched a five-year, fixed-rate mortgage at 4.99 per cent, with up to 75 per cent LTV. For homeowners unable to find a 25 per cent deposit, they have also unveiled a rate of 5.75 per cent with up to 85 per cent LTV.

"For the first time in a long time we have seen other lenders retaliating in an effort to undercut the competition," says David Hollingworth, from mortgage broker London & Country. "We are not returning to a pre-credit-crunch lending environment, but there are signs of a little loosening of lending criteria," he said.

The latest figures from the Council of Mortgage Lenders (CML) also indicate that credit conditions are slowly easing. The number of house-purchase loans grew to 50,600 in September, an increase of 2 per cent on the previous month and 45 per cent up on the figures for September 2008. This was the third month in a row in which there had been a year-on-year increase in lending for house purchases.

But UK house-sale activity is only two-thirds the long-term average. Partly, estate agents say, this reflects a shortage of property in some areas, particularly London. But despite this apparent slackening in lending, and a host of new products, many borrowers are still struggling to find a good deal without a big deposit.

And the price of not having such a deposit can sbe high. According to financial information service Moneyfacts, the average fixed-rate mortgage with a 75 per cent LTV is 4.5 per cent, while fixed rates with a 90 per cent LTV average 6.2 per cent.

Furthermore, when the Bank of England base rate rises from the current 0.5 per cent, many homeowners will see their monthly repayments shoot up to what could be an unaffordably high level. "For those without a considerable deposit, caution must be urged. Some of the variable rates on offer at a higher LTV are a long way above the Bank base rate, meaning that when rates rise, repayments could jump through the roof," says Paul Lawler from price comparison service Moneysupermarket.com.

First-time buyers in particular have to contend with strict lending conditions and demands for high deposits. Lending for first-timers is on the up, but they still face an upward struggle unless they have a 25 per cent deposit. Lending increased to 19,700 loans in September, a 5 per cent jump on the previous month and 45 per cent higher than in the same month of 2008. A third of first timers have benefited from the Government's temporary increase in the 0 per cent stamp duty threshold to £175,000. Yet even with the saving and increased lending, new buyers are required to dig deep.

"It is not true to say that loans are much easier to come by – lenders are still cautious and more needs to be done, particularly for first-time buyers," says Ms Bien.

The average loan to value for a first-time buyer was 75 per cent in September, requiring them to hand over a deposit of no less than 25 per cent of the property's value. Last year, they would have needed a minimum deposit of just 16 per cent. A 25 per cent deposit for a property worth £175,000 works out to £43,750 – a figure hardly associated with an average first-time buyer. Even worse, once the temporary stamp duty holiday ends on 1 January, on property worth up to £175,00 they will have to factor in an extra 1 per cent tax, and finding a decent deposit will become even more arduous for all but the best savers, or those who can rely on the bank of mum and dad.

Says Mr Hollingworth: "First-time buyers still face an uphill struggle in order to get a deposit together, secure a mortgage and ultimately drag themselves on to the property ladder."