First time buyer mortgages are key to the market recovery

For any kind of sustained recovery in the housing market there has to be a drastic improvement in first time buyer mortgages.  First time buyers are new or returning to the market and stimulate buying and selling further up the chain.

There is an argument that banks freely lending in the past using high income multiples and high LTV have helped over stimulate house prices leading to the current downturn in the housing market in 2009.

Looking back a couple of years ago a typical first time buyer mortgage was at a rate of 6.2% when the Bank of England base rate was at 5%.  Today a typical rate is still over 6% even though the base rate is at an all time low of 0.5%.  Lenders are in most cases unwilling to lend over 90% LTV which is making the situation very difficult and expensive for these new to market buyers.

When looking at figures for potential first time buyers there has to be a distinction between two groups, and it is both groups that need to get back into the market:

“True” first time buyers – typically the younger generation looking to get an initial foot onto the housing market, who have difficulty with raising deposits and possibly a limited income.

“Returning” first time buyers – previous homeowners who have sold their property and may have spent some time renting.  These potential buyers are likely to be older, have more substantial deposits, an improved credit rating and have higher incomes.

Both these groups need to return to the market in order to kick start the recovery.  With rising fixed rate deals and the requirement for high deposits part of first time buyer market is currently being frozen out.  There are moves to limit income multiples and remove 100% LTV deals which further puts pressure on these buyers, but with over inflated prices and the current downturn it seems that the only way stability will come back to the market is when house prices are set at a more realistic level. 

As we move through 2009 we will also see if quantitative easing will filter through and lending conditions improve especially for first time buyer mortgages, with more deals available and better competitive rates.