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Last of the big-time lenders hits first-time buyers hard

The number of first-time home buyers has dropped to an historic low, with thousands of young adults unable to scrape together the minimum deposit needed for a mortgage.

According to researchers GfK, the number of first-time buyers has halved in the course of the last five years and is now at its lowest level for at least 20 years. A mere 7% of the mortgages arranged last month by leading broker John Charcol were for those who are first-time buyers.

Not only is it difficult for first-time buyers to obtain the high loans to value (LTVs) that they typically need to get on the housing ladder, but they are likely to pay more where they can borrow.

Banking market researchers Defaqto warn that the norm is for higher LTVs to be costly - adding as much as 2% to the interest rates, which works out at an extra £3,000 a year on a £150,000 mortgage.

"The keenest rates are for those seeking a mortgage of less than 75% LTV," says Defaqto's David Black. "Mortgages permitting 90% LTV are significantly more expensive. First-time buyers are particularly hard hit, as they need a substantial deposit merely to get on the housing ladder and a significantly larger deposit to access the best rates."

But there are now signs of a greater willingness to lend a higher share of the necessary capital for home purchases.

While only three 95% LTV mortgage products were available a year ago, now there are 19 mortgage products with 95% LTVs.

There are also big increases in the availability of mortgages offering 90%, 85%, and 75% LTVs. Both the merged Britannia/The Co-operative Bank and Santander's Abbey brand have just launched new 90% LTV mortgage products.

Michelle Slade of Moneyfacts says: "Lenders are becoming more active in the mortgage market, which is welcome news for borrowers, as increased competition is one of the overriding factors in driving rates downwards. A 25% deposit remains the benchmark for the majority of the most competitive deals.

"However, borrowers with a small deposit are increasingly getting access to a wider proportion of the market.

"The platform is developing for a resurgence in the mortgage market, but lending figures show that there is still a way to go before the market returns to any sort of normality."

Northern Bank has established itself as one of the lenders most willing to lend to first-time buyers and at high LTVs.

Danny Stinton, head of business planning at Northern Bank, explains: "We have retained our 100% LTV mortgage throughout 2009 and 2010 and we continue to do so. We're able to do this because we are and always have been a responsible lender.

"This means assessing every application individually so that both the bank and the customer are satisfied that the product is suitable for them and affordable, even if their circumstances or the interest rates change."

Mortgages generally are also becoming increasingly attractive.

Along with LTVs going up, average fixed rates have come down. Analysis by Moneyfacts shows that average rates for a five-year fixed-rate mortgage have fallen from 6.24% last August, to 5.85% now.

Average rates for a three-year fixed rate are now 5.34% and for a two-year fixed rate it is 4.63%. The best rates available are now down to 4.49% for long-term fixed rate (Co-operative Bank) and 2.39% variable rate (First Direct - see best buy charts).

There are also promising signs of innovation in the market. HSBC has just announced a Split Loan Mortgage, giving borrowers a third option when considering whether to opt for a fixed or a variable rate mortgage - they can do both.

Borrowers can choose to fix 25%, 50% or 75% of their loan, with the balance on a tracker initially set at the same interest rate as the fixed element.

The interest rate on the fixed element depends on both the LTV and the proportion of the loan that is fixed.

Other lenders - including the Coventry and Nationwide Building Societies - have also just launched new products and, in the case of the Nationwide, cut interest rates on some mortgage products. The outlook for the mortgage market is beginning to look more promising.

However, the Council of Mortgage Lenders warns any incoming government that they must not damage it by withdrawing government support programmes from the sector too quickly.