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Mortgage rates hit record lows, but first-time buyers remain squeezed

Fixed-rate mortgages are at lowest-ever levels, according to Moneyfacts, but approvals for low- and middle-income borrowers are also falling

Lenders have slashed fixed-rate mortgages to record lows, but Britain’s biggest firm of property valuers has revealed only existing homeowners are benefiting, with first-time buyers facing a renewed squeeze.

Coventry building society has slashed rates on its five-year fixed-rate mortgages to less than 3.5% for the first time. Northern Rock has sliced 0.9% off some of its deals, while Nationwide, Skipton and Barclays have all taken the axe to interest rates.

But a report by e.surv, the country’s largest provider of residential valuation services, has revealed that despite rate cuts and the recent appearance of more 90% deals, loan approvals for anyone on a low or middle income have fallen back significantly.

E.surv found that the only price bracket in which lenders were more willing to grant loan approvals was for the £750,000+ house purchase market.

It said: “Approvals fell on all price brackets below £750,000, with lower income buyers in particular struggling to secure mortgage finance against a backdrop of tighter lending conditions.”

The deposits required by lenders have become even more demanding, in striking contrast to reports that loan-to-value (LTV) limits have been easing. E.surv found that the typical first-time buyer granted a mortgage in July had to find a deposit of 33%. This takes average LTVs back towards rates last seen during the darkest days of the credit crunch.

“Despite more high LTV products entering the market, lending criteria tightened most at the lowest end of the property ladder,” e.surv said. The biggest squeeze on first-time buyers is in London, it added, where “wealthier buyers continue to represent a disproportionate share of the market.”

Existing homeowners with large amounts of equity in their property are benefiting most from plummeting mortgage rates. Coventry’s 3.49% five-year fix is only available to borrowers who can stump up a deposit of at least 35%.

Data provider Moneyfacts said the current best-buy medium-term fixed-rate mortgages – Chelsea building society’s 3.39% five-year deal and Coventry’s 2.99% four-year deal – are the lowest rates they have ever recorded. But again, both deals require a deposit of at least 30%.

The round of price-cutting by mortgage lenders is a surprise spin-off from the recent crisis affecting the euro. Money market rates for lending in Italy and Spain have spiralled upwards, but in the UK and the US the opposite has happened. Interest rates on gilts and “swaps”, which largely determine the price of fixed-rate mortgages, have moved downwards. The US Federal Reserve’s recent statement that its rate is likely to stay on hold until at least mid-2013 has forced rates down across the board.

But although headline rates are falling, banks have become more cautious about who to lend to. Gross mortgage lending by the high street banks fell in the first six months of 2011 as they focused on lower-risk borrowers with big deposits and buy-to-let landlords. Northern Rock reported the biggest fall, with gross mortgage lending down 25%. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds