First-time buyers feel squeeze as lenders withdraw best deals

First-time buyers are being forced to work even harder to find a lender who will help them take their first step on the property ladder, after another handful of major banks pulled their most competitive mortgages from the market this week.

Scottish Widows yesterday scrapped its 100 per cent home loan, which was targeted at young professionals without a deposit. The Co-operative Bank also pulled its entire two-year fixed-rate mortgage book from the market, while Woolwich axed a handful of its tracker and offset products, and has yet to announce any replacements. Halifax was rumoured to be considering withdrawing a number of its mortgages this week.

The latest removals come after First Direct – which was believed to be writing as many as 5 per cent of all new mortgages last month – announced it was temporarily pulling out of the mortgage market altogether on Tuesday night, as it struggled to cope with the massive demand for its competitive fixed-rate mortgage. In the sub-prime market, which provides mortgages to those with poor credit ratings, two more lenders – SPML and Preferred, both owned by the US investment bank Lehman Brothers – also closed their doors to new business yesterday.

The squeeze in the market was illustrated in figures from the Bank of England yesterday, which revealed the number of mortgage approvals in February was down by 34 per cent, compared with the same month last year.

Melanie Bien, a director of the mortgage broker Savills Private Finance, said it is now undoubtedly more difficult to find a mortgage, both for first-time buyers and homeowners looking to remortgage.

"There are still mortgages available to those buying for the first time or remortgaging but it is tougher out there," she said. "The majority of lenders are edging up pricing on fixed-rate and tracker mortgages to protect service levels and as an alternative to pulling out of the market entirely.

"We expect this to continue in coming weeks as the liquidity crisis shows no signs of easing. Rates are being pulled with little or no notice so borrowers need to move quickly to secure a rate they like the look of.

"Those coming up to remortgage can protect themselves and buy some peace of mind by reserving a rate up to six months before they need to remortgage. The only cost is the valuation and possibly a non-refundable booking fee, depending on the lender. When you come to remortgage, if rates have fallen in the meantime you are under no obligation to take the reserved rate but can take the best-priced deal at the time."

Many people coming to the end of a fixed-rate deal at the moment are likely to end up paying more in interest once they remortgage. Two years ago, when the Bank of England base rate was some 0.75 percentage points lower than it is today, the best two-year fixed-rate mortgages were priced at around 4.35 per cent, with fees of approximately £500. Today, the best deal is almost a whole percentage point higher, 5.29 per cent, from Woolwich, with a fee of £995. For someone with a £200,000 interest-only mortgage, that amounts to an extra £150 a month.

How to get a mortgage with ...

* NO DEPOSIT

Borrowing 100 per cent of your property's value is now extremely difficult. After Scottish Widows pulled out of the market, only Abbey and Bank of Ireland/Bristol & West now offer 100 per cent deals, and in the case of the latter, you need a parent to also put their name on the mortgage with you.

"You're going to need to have a squeaky clean credit score to be considered for one," says David Hollingworth of the fee-free mortgage broker London & Country. They're expensive, too.

* 5 PER CENT DEPOSIT

"If you've only got a 5 per cent deposit, your choices are much more restricted than they would have been a few months ago," says Mr Hollingworth. "But there are still a few deals out there."

However, the good news is, that if you can secure a mortgage, it'll be much cheaper if you only need to borrow 95 per cent.

*10 PER CENT DEPOSIT

If you need to borrow less than 90 per cent of your property's value, there are many more deals on offer – and the market continues to open out even wider once you get past 75 per cent. In short, the bigger the deposit you have, the better deal you can secure.

James Daley