Good news for mortgage borrowers with 25% deposits

Competition heated up this week for mortgage borrowers with 25% deposits - but what does this mean for everyone else?

If anything has characterised the constriction of the mortgage market over the last couple of years, it is the dramatic restriction of high loan-to-value mortgage lending. In other words, lenders now demand bigger deposits, and reserve their best products for those with a whopping 40% upfront.

Gone are the days of 100%, or 'no deposit' mortgages, and many of us here at lovemoney.com would argue that's a good thing.

However, there's no doubt conditions have got tougher for first-time buyers as a result. Since very few have a large deposit, most have found that - just as property prices finally fall within their grasp - they are foiled at the last hurdle by the lack of affordable mortgage finance.

But after months of promises from the Government and lenders to free up mortgage lending, is the situation beginning to ease? And are lenders becoming a bit more flexible about providing attractive deals to those with smaller deposits?

Loosening up?

In the last few weeks, there has been some movement from lenders into higher LTV markets, meaning good news at last for first-time buyers.

HSBC was one of the first to act. It decreased the maximum deposit needed on some of its most competitive deals from 40% to 25%. This opened up the deals -- which included a 2.95% tracker rate -- to an estimated 20% of the UK mortgage market. In other words its best mortgages can now be accessed by a lot more people.

The lender then launched a new range of best buy 90% LTV deals, albeit with a whole host of restrictions. Still, if nothing else, these deals gave the market a decent, sub-5% fixed rate at 90% LTV for the first time since the credit crunch really started to bite. To find out how to get one of these deals, read New deals for first-time buyers.

Woolwich wades in

This week, things have loosened up even more. Woolwich cut its mortgage rates on more than half of its range by an average of 0.35%. It made particularly large cuts on its higher LTV deals. For example, its two-year fixed rate at 80% LTV was cut by a whopping 0.7%, to 4.99%.

In other words, Woolwich is competing at a higher bracket of the LTV spectrum, not simply reserving its best products for those borrowing up to 60% of the property's value. The lender's lowest two-year fix at 3.69% was previously only available up to 60% LTV, for example, but the lender has now opened it up to those borrowing up to 70% of the property's value.

Likewise, its best three-year fixed rate at 3.99% is also now available up to 70% LTV rather than 60%. Good news for borrowers with 30% upfront.

What else?

In the last week, sister lenders Yorkshire and Clydesdale Banks also offered a boost to borrowers. They waived all arrangement fees for remortgagors across a wide range of their products, meaning that those choosing to remortgage to one of the applicable fixed, offset or current account mortgages, available up to 80% LTV, will pay no arrangement fees -- a huge saving of £999. The rates start at 3.79% at 60% LTV and 3.99% at 80% LTV.

In addition, the lenders are still offering deals up to 95% LTV -- the only mainstream national lenders to do so.

But despite the mortgage market creeping towards looser lending criteria, it is still the case that the best mortgage deals across the market are reserved for those with a 40% deposit.  Borrowers with just 10% will still struggle to find a competitive deal.

Low LTV lending lingers on

According to figures released from lovemoney.com partner Moneyfacts this week, the number of new mortgages requiring a minimum of a 40% deposit has actually increased by 61% in the last six months.

In contrast, the number of mortgages requiring a 10% deposit has decreased by two- thirds in the last six months.

The research also shows that the average mortgage rate for a 60% LTV mortgage is currently 4.29%, compared to 5.92% six months ago -- a drop of 1.63%. The availability within this tier has increased from 184 products to 297 today. Cheap deals aplenty then for those with a chunky deposit.

But if you only have a 10% deposit, you will be paying an average rate of 5.98%, and this has dropped by only 0.74% since last November. And you have a choice of just 71 products.

In other words, banks still prefer to lend to borrowers with 40% deposit or equity. And they still charge more when lending to borrowers with very little equity.

Why don't the lenders want to lend?

When house prices are falling and unemployment is rising, borrowers with small deposits are riskier to lend to than borrowers with big deposits. It's as simple as that.

But even if lenders were willing to take this risk, they are forced by regulators to keep more money aside when they lend to riskier clients. And in the current climate, they don't have enough cash to lend the volumes they did in the past.

Which is why I believe that 90% LTV lending will remain tight and expensive for some time yet -- the numbers simply don't stack up for mortgage lenders at the moment, despite huge Government pressure to lend more.

On the bright side, we might begin to see a few more lenders behaving more competitively in the 75% LTV tier over the coming months, where the risks are lower and they do not have to tie up as much of their capital in order to lend.

Maybe, just maybe, we are starting to see the beginning of the end of the mortgage freeze?

Compare mortgages at lovemoney.com