Page last updated at 07:53 GMT, Monday, 27 April 2009 08:53 UK

Is the first rung on the property ladder broken?

By Kevin Peachey
Personal finance reporter, BBC News

House keys
Getting the keys to a first home is becoming more difficult for some

Prospective first-time buyers must think they have walked under the property ladder, rather than stepped onto it, such is their run of bad luck.

Traditionally, falling house prices are good news for those looking to buy for the first time. After a decade of watching the UK property market become increasingly bloated, these people would have watched it deflate with some relief.

But despite homes becoming more affordable, buyers looking to get on the ladder have found the first rung to be broken.

The global financial crisis has left lenders extremely cautious about taking on new, untested creditors without these buyers offering a big deposit upfront.

'On tenterhooks'

Take the case of Sean McAuley, a music teacher from Kettering. Having turned 40, and spent all his adult life as a tenant, he decided it was time to invest in his own place.

Eight months earlier, I could have taken my pick from about 20 [lenders]. By now it was down to two
First-time buyer Sean McAuley

But despite getting regular work as a supply teacher, lenders were seemingly wary of his ability to repay a home loan because he was a first-time buyer.

He accepts that some of these banks may have been stung by the irresponsible borrowing of others in the past.

"You can borrow and borrow, but you've got to pay it back," he says.

He seems like a perfect customer. He had saved hard in the previous few years to raise a deposit of about 10% of the value of the home he wanted to buy.

But hardly any lenders were happy to consider his custom.

"Eight months earlier, I could have taken my pick from about 20 [lenders]. By now it was down to two," says Sean, who had to rule out deals requiring a 25% deposit.

He then had to wait five or six weeks to get approval for the mortgage. At the height of the boom, this sort of deal gained almost instant acceptance.

"They left me on tenterhooks. They were very stringent. The length of time was a surprise, at one point you could have got a mortgage in ten minutes," he says.

Slim pickings

The latest figures show how the choice of mortgages for people offering a 10% deposit has fallen steeply.

Don't swap bank account just before applying for a mortgage
Have a credit card or two that you pay off every month
Make sure you are on the electoral roll
Be prepared to stay in the same home for some years
Source: Ray Boulger, mortgage expert

At a peak at the start of February 2008, there were 1,197 deals available at this level. By the start of April this year the number had fallen to 93, according to financial information service Moneyfacts.

In its last mortgage data report, the Council of Mortgage Lenders said first-time buyers typically had to find a deposit of 25% - a record amount. Only 9,400 home loans were completed for first-time buyers in February, down 46% on a year earlier.

"Such amounts remain out of reach for all but the most affluent buyers," says the CML's Michael Coogan.

As a result, the bank of mum and dad came into play for young buyers. Older buyers, such as divorcees, made up a greater proportion of new borrowers.

The Royal Institution of Chartered Surveyors agreed that it was tough for first-time buyers.

The scraps of comfort among recent housing surveys came from the government's data.

The price buyers were paying for their first home in February was 15.1% lower than a year earlier, according to the Department of Communities and Local Government. That was a swifter decline in prices than the UK average of 12.3%.

Buyers' market

It is a picture of the market that Sean McAuley recognises. After getting his mortgage, he had little trouble in getting the price of his chosen property reduced.

Doll's house
Getting a mortgage is hardly child's play at present

"It is a dead market," he says, as a freezer is delivered to his new home. "I felt in a position to knock them down; it is a buyers' market."

He is now happily installed in his new home facing the joys of DIY.

So what tips are there for other first-time buyers hoping to get into the same position but struggling to get a mortgage?

Ray Boulger, of mortgage broker John Charcol, says there is a series of elements that a picky bank or building society will look for as evidence that you are a good borrower.

To maintain a good credit score, potential borrowers should make sure they are on the electoral roll, should not change their bank current account just before applying for a mortgage, and ensure they have one or two credit cards that they keep on top of.

For most first-time buyers the mortgage will be their biggest monthly payment
Ray Boulger

All of these show that a borrower can be trusted to keep credit under control. So, somebody with credit cards which they use and pay off in full at the end of the month is a better option than a wannabe borrower with no credit history and a small pot of savings.

Many lenders want a history of addresses so it is worth ex-students who lived in the university town for half the year and at their parents' home during holidays to put the family home as the principal address, Mr Boulger says.

How long to fix?

So which kind of mortgage should these first-time buyers choose?

According to Mr Boulger, a five-year, fixed-rate home loan looks like the best option at present for those looking to borrow 85% or 90% of a property's value. Very few tracker deals are available at this loan-to-value level.

"For most first-time buyers the mortgage will be their biggest monthly payment. They tend to be more likely to take comfort from a fixed rate by knowing what they are paying," he says.

With house prices still falling, those buying a home now are unlikely to have any equity in the property for two or three years so they might want to think more long-term and be prepared to live in the same house for some time.

Mr Boulger estimates that a 10% increase in value is needed to cover the costs of moving - such as legal fees - to a property of the same value.

And while getting a two-year fixed-rate mortgage might lead to cheaper repayments in the short-term than a five-year deal, when it comes to renewing, interest rates are likely to have risen again.

"There will be some initial pain to secure for the long-term," he says.

Print Sponsor

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific