'Glimmer of hope' for first-time buyers

By Jim Reed
Newsbeat reporter

Average rates for a two-year fixed rate deal are down to 7.01%

Mortgage advisors have told Newsbeat there are signs the credit crunch is easing, making it cheaper for first-time buyers to get on the property ladder.

The interest rate paid on a typical first mortgage has started to fall over the last month, according to research carried out for Radio 1, with a series of cuts from all the major high street banks and building societies.

Ray Boulger at the mortgage brokers John Charcol said: "I think June or July saw the peak in rates. We expect them to keep falling for the rest of the year.

"There is more competition in the mortgage market and we wouldn't have that without more confidence.

"The big banks are starting to slug it out a bit."

Figures put together by the financial information company Moneyfacts for Newsbeat show the average interest rate paid on a new 95% two-year fixed rate deal has fallen to 7.01% from 7.19% in July.

It would cut the monthly repayments on a new £150,000 interest-only loan from £899 a month to £876.

That mortgage deal, popular with first-time buyers, would pay for 95% of the value of a new property, meaning they would still have to find a 5% deposit.

The "two-year fixed" part means the interest rate on the loan is set at 7.01% for the next two years.

After that it would switch back to a floating or variable rate based on the Bank of England's official interest rate.

Credit crunched

The credit crunch, which started a year ago, has forced up the cost of borrowing money around the world.

Banks both here and in the United States lost billions of pounds in the American housing market.

That, in turn, led to a loss of confidence as banks started to worry about the safety of their other investments.

Almost overnight it became much more expensive for banks to borrow the money they need to pay for new mortgages in the first place.

The situation led to the collapse of Northern Rock here in the UK and other banks in the United States.

Turning the corner?

However, the interest rate that banks charge each other to borrow money has dropped over the last month as confidence begins to return to the market.

Lenders are passing on some of that saving to new mortgage customers - but there is a long way to go.

First-time buyers shouldn't be in a rush. But at the moment it's a buyer's market Ray Boulger, mortgage broker

Banks are still very cautious about the kind of customer they lend to.

Many are asking for higher salaries and a flawless credit rating before they will even consider lending money.

Taking out a new loan on a first house today will set you back much more than it would have done a year ago.

While the average rate on a standard 95% two-year fixed mortgage has fallen to 7.01%, it is still way above the 6.56% you would have paid back in August 2007, according to Moneyfacts, despite the fact the Bank of England has cut official interest rates.

There are also less mortgage deals to choose from.

Banks and building societies were offering a total of 235 95% deals back in August 2007, now there are just 12 to pick from.

100% mortgages, which let first-time buyers borrow without a deposit, were popular last year with 59 on offer. Today there's just one.

"Some people should never buy a house because their finances don't stack up or they move around frequently," said Ray Boulger at John Charcol.

"First-time buyers shouldn't be in a rush. But at the moment it's a buyer's market and if you can find the right seller, you might be able to negotiate a good deal."