Ways round gap in deposit funding

Our latest mortgage lending figures show that in 2011 first-time buyers needed to find an average deposit of 20 per cent, up from 10 per cent in 2007. In money terms that’s the difference between a £14,000 deposit and a £28,000 deposit on a property of a similar value.

Paul Smee CML

While there are signs that the amount needed for a deposit is falling, potential buyers – including many who can already afford the monthly payments – are still struggling to make up the money.

Even for those borrowers who can purchase a property, they will often need help from the ‘bank of mum and dad’. The percentage of first-time buyers purchasing with assistance sat at 31 per cent in 2005, rising to 66 per cent in 2011.

To address the problem, trade associations and the government have been working closely to encourage lenders and house builders to reduce the deposit funding gap.

Last week Aldermore announced that they were the latest lender to join the NewBuy scheme. NewBuy – developed by the Home Builders Federation, the government, and the CML – allows those buying newly built properties to take out a mortgage between 90-95 per cent of the value of the property, with house builders and the government committed to covering a limited amount of any future losses that lenders in the scheme could suffer. MI New Home, a similar scheme in Scotland, was launched in mid-September.

There are also signs that the market for first-time buyers and home movers is easing slightly. Lenders are increasingly cutting interest rates and granting larger advances while a newcomer to the market, Castle Trust, plans to offer a new product innovation aimed at helping buyers without a large deposit.

So where does this leave us?

Schemes such as NewBuy and MI New Home should motivate more first-time buyers and home movers to purchase new homes, while also increasing the level of net lending currently in the market. They won’t be an instant panacea and they won’t stop commentators decrying the difficulties facing first-time buyers, but we should all be aware that there are an increasing number of ways round the deposit funding gap.