People looking for their first contractor mortgage will know that lenders are asking for extortionate deposits, but did you realise that the average deposit has risen tenfold since 1990?

The average deposit now stands at nearly £66,000, according to new research from First Direct. In 1990, the average deposit was £6,793; now it is £65,924. During the same period, house prices have increased fourfold. The average loan to value in 1990 was 88% but today it has dropped to just 73%.

Bruno Genovese, First Direct’s senior savings product manager, said the average age of first time buyers is increasing and more and more people are struggling to get their first foot on the housing ladder. 2010 proved to be the hardest year for house buying in the past 20 years as the average house price reached more than six times the amount of the average household income.

Although a lot has been made of increased house prices, the average deposit needed to get a mortgage has increased more than twice as quickly as house prices and nearly four times as fast as income.

House prices did decrease in July, with homes in the West Midlands witnessing the biggest decrease at 4.6%. The only area which witnessed an increase was London where prices rose by 0.9%.

The average house price in the UK in July was £207,690 but that average drops to just £133,163 for buyers in the North East of England. At the other end of the spectrum, the average property in London is more than £200,000 more expensive at £347,271.

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The buy to let market is booming as many landlords apply for refinance in order to expand their portfolios.

Since the spring, property investors have been enticed by strong demand from tenants and rising rents. In fact the average rental income in the UK has risen for seven successive months and reached a new monthly high of £713 in August.

Between April and June, buy to let landlords took out 32,000 mortgages to the value of £3.5 billion. That’s a 21% increase on the first quarter of 2011 and the highest number since Q4, 2008. 65% of these loans were for remortgages.

John Heron, from buy to let lender Paragon, said the main reason why landlords remortgaged during Q2 was to raise capital. Around 66% of private rental properties are not mortgaged and the average LTV on those that are is 48%. Landlords are looking to utilise the huge amount of equity that exists in the rental sector in order to grow their portfolios.

The most popular area for buy to let purchases is currently London, but landlords are also favouring Birmingham, Manchester and Portsmouth.

According to property investment advisers, Assetz, more than 75% of its investors are thinking about purchasing more investment properties in the coming 12 months and they say strong demand from tenants is one of the primary reasons for adding to their portfolios.

Property investors are also starting to return to the new-build housing market. Nick Vaughan from Hamptons International explained that new-builds are now priced more sensibly and provide a decent yield.

Skipton Building Society currently offers the best buy to let deals with a two year 60% LTV tracker mortgage at 3.24% plus fee of £1,240.

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In 2001, 568,200 first time buyer mortgages were granted. In 2010 this had dropped to 199,200. The average deposit for a first timer in 2001 was £6,320 – this year it’s £26,000. Is it any wonder then that the majority of young people cannot get a foot on the housing ladder?

Some mortgage lending institutions have stepped in to help. Aldermore for example announced a 100% contractor mortgage recently, but in order to take advantage of the deal, first timers need a family member to guarantee the loan. Bath Building Society and National Counties have similar deals, although they both require a small 5% deposit.

These deals could appeal to parents who want to help their offspring buy a property but don’t have large sums of spare cash sitting around in a savings account. To qualify as a guarantor, you need home equity of at least 25% which then acts as collateral against the mortgage and can be called in if the buyer defaults on repayments.

As long as the mortgage repayments are kept up to date, the parent has nothing to pay although having the charge on the property could prove detrimental if parents are moving home or want a remortgage.

The Aldermore deal sounds appealing but with house prices still decreasing, there is a danger that the first time buyer will quickly sink into negative equity. Aldermore’s rate of 6.84% is also significantly higher than the majority of other deals.

National Counties is charging a fixed rate of 4.99% until November 2013 and the Bath Building Society deal is a three year fix at 5.29%.

Parents who are considering helping their child through one of these schemes should first check when they will be released from their obligation. With Aldermore, the maximum term for a guarantor is ten years. With other lenders it is often when the mortgage is less than 75% of the value of the property, and if property prices continue to go down, this could mean a long wait.

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Contractor mortgage seekers looking for long-term security over their payments might be interested to know that the Chelsea Building Society has now launched a 10 year fixed rate product at 3.99%. However, the mortgage is only available to people with a 30% deposit and it does attract a fee of £1,495.

Nevertheless, the security of knowing exactly how much your repayments are going to be is sure to appeal to some people, especially at a time when fixed rates are at a record low and nobody knows when the Bank of England will raise the base rate.

There is a downside to the deal in the shape of hefty early repayment penalties. But the repayment penalties decrease as the mortgage life increases. In the first three years, the penalty is 7% on the balance owing, which would mean £10,500 on a mortgage of £150,000.

The best five year fixed rate mortgage currently comes from the Yorkshire Building Society. At 3.79% and 75% LTV, it has a modest £95 arrangement fee.

Mortgage seekers are in something of a dilemma at the moment. Everyone has different circumstances and with continued economic uncertainty fixed rate deals are becoming ever more popular.

Meanwhile, the CML has spoken out against a plan to have a national mortgage register in the UK, saying it is unnecessary and would lead to significant costs being passed on to consumers.

Antolin Sanchez Presdeo, a member of the EU economic and monetary affairs committee, has proposed that each EU member state creates a national database of mortgage loans to allow appropriate supervision and ensure traceability.

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The outlook for the UK housing market is still unstable and one expert has warned that homeowners should not rely on state aid to fully cover their mortgage repayments if they lose their job.

Homeowners are facing problems selling because of tighter mortgage lending criteria and the industry could be restricted further if new EU regulation comes into force later this year.

In 2009, the government launched the Mortgage Rescue Scheme to help people who were struggling to keep up their repayments and wanted to downsize. The scheme was meant to help 6,000 struggling households but so far it has helped only 2,600 in two years.

It was thought that each rescue would cost about £34,000 but this turned out to be a ridiculously low estimate and the average rescue cost stands at £93,000.

Despite government cutbacks, as many as 33% of homeowners think the state will step in and cover their contractor mortgage repayments if they suddenly found themselves without a source of income.

Even more surprisingly, a recent survey discovered that only 11% of homeowners have mortgage payment protection insurance and just 4% have income protection insurance. At the same time, nearly 50% said they would be able to survive for no more than three months if they had to rely solely on their savings. Mortgage payment protection can offer a real lifeline to householders who find themselves in financial difficulties.

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Concerns are increasing that mortgage lending institutions will soon start taking a tougher stance on mortgage defaulters leading to an increase in the number of properties repossessed.

Data recently released by the CML showed a 7% decrease in repossessions during the first six months of this year, compared to the comparable period last year.

In the second quarter of 2011, 9,000 homes were repossessed, 100 less than in Q1. In the first six months of 2010, there were a total of 19,500 repossessions.

However, the MD of xit2, Mark Blackwell, said contractor mortgage arrears and resultant repossessions are like an iceberg waiting to strike the market and there is trouble brewing below the surface.

Lenders are reaching breaking point and can no longer continue forbearance when a borrower has no hope of paying off mortgage arrears. He went on to say that there has been a considerable increase in repossessions from one mortgage lender after it changed its rules on forbearance.

The CML has estimated there will be 45,000 repossessions in 2012, a figure Blackwell says is conservative.
Chris Garner, a director of Obligo.co.uk said repossession rates have been kept artificially low as lenders have extended tolerance to late payers. However, this situation cannot continue indefinitely and once lenders alter their approach to forbearance, thousands of households could find the rug pulled out from under them.

CML data also showed that 78,500 people were in arrears of between 1.5% and 2.5% of their outstanding mortgage balance in Q2 this year, an increase of 700 on Q1. But there was a decrease of 2,200 in the number of people with arrears in excess of 2.5%.

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827,000 mortgage borrowers are currently in negative equity – the situation that arises when the amount they owe on their mortgage is greater than their home is worth.

The CML says the data for Q1 this year suggests that the current problem is not as bad as it was in the early 1990s when approximately 1.6 million householders had negative equity. Furthermore, whilst negative equity make things hard for people moving home, it means their property is unlikely to be repossessed.

The CML study also shows that less than one in twelve of all UK mortgage holders currently have negative equity. However the main proportion of people who are, are those who bought their home between 2006 and 2008 and have been most affected by falling house prices, and first time buyers who bought their property with a small deposit.

50% of all cases of negative equity involve people who took out a mortgage in 2007, when it was easy to get a contractor mortgage and house prices were at their peak. The CML also estimates that 39% of people with negative equity are first time buyers. Humberside, Yorkshire, the North East of England and Northern Ireland are the worst affected regions.

Almost 50% of people who have a mortgage have one worth less than 70% of their homes’ value and a further 25% of borrowers have a mortgage of between 70% and 90%. The remainder have less than 10% of their own equity in their property.

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More than seven out of ten UK homeowners worry about mortgage rates and 14% are struggling to keep up with their repayments, according to a new study by consumer group Which?

The research also shows a 75% of households would feel the impact if their repayment increased by £50 a month. 37% said a rise would mean they would have to curtail their regular spending, 20% would need to cut down on the amount they save and another 9% would be unable to afford some essentials.

In cases where contractor mortgage borrowers with financial difficulties approached their mortgage lending company, 78% were offered help such as transferring their home loan to an interest-only mortgage. However, Which? says that some lenders are still not doing enough to assist their customers.

At the end of last week, the CML reported that repossessions in the first half of this year fell by 7% compared to the same period in 2010. But banks and building societies have been more inclined to exercise forbearance than they were during the recession in the early 1990s due to recent steep declines in house prices.

It is thought that many homeowners unable to meet their original mortgage repayments may not show up in the official arrears figures and the FSA has warned that the excessive forbearance could lead to problems later. The regulator recently released new guidance saying that when lenders change a mortgage to interest-only from capital repayment, they must reassess the risk level and make the appropriate adjustments to their balance sheets.

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The latest house prices index from the Halifax shows a month-on-month increase of 0.3% in July as record low interest rates helped support demand from residential property seekers.

The mortgage branch of Lloyds Banking Group Plc reported last week that house prices last month reached an average of £163,981. Although this was an increase on June’s figure, prices still remain 2.6% down compared to this time last year.

The housing market is still struggling as consumers suffer high inflation and government austerity measures. The economy grew by a mere 0.2% in Q2 leading to the Bank of England holding the base rate at 0.5% last week.

Martin Ellis, an economist from Halifax, said the number of properties for sale, and the level of sales, has remained virtually unchanged since late 2010. Inflation was 4.2% in June and higher taxes and low wage increases are seriously depleting household budgets. On the plus side, the slowly improving economy, coupled with low interest rates, will ensure there is a certain level of demand.

Howard Archer from IHS Global Insight does not expect things to improve dramatically in the foreseeable future. He said that growing fears of a double dip global recession will not encourage contractor mortgage holders to commit to buying a new home.

Although the number of mortgage approvals increased to 48,421 in June, net mortgage lending dropped by £100 million, data from the Bank of England shows. At the height of the housing boom, the average monthly rate of approvals was 119,000.

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After the U.S had its credit rating downgraded last week, it’s good to know that some of the UK’s building societies had their credit rating upgraded last week.

Moody’s, the credit rating agency, upgraded Nationwide, Principality and Yorkshire by two notches and the Coventry building society by one notch. It also upgraded the Newcastle and the Nottingham from a negative to a stable rating.

This should come as good news to contractor mortgage seekers who save with building societies as the vote of confidence will enable them to offer better mortgage rates. The better its debt score, the cheaper it becomes for a building society to borrow funds from the money market and pass the saving on to its members in the form of cheaper mortgages.

A Yorkshire Building Society spokesman said he was delighted that Moody’s had recognised the strong financial position of the Society and although specific details have not yet been finalised, this will have an impact on mortgage products.

The building societies are winning the mortgage war against the banks. The Leeds, Nationwide, Skipton and Yorkshire have been battling it out for supremacy and this has led to record low 3.39% fixed rate mortgage products over a five year term.

The Building Societies Association says this boost in ratings confirms that the sector is recovering from the economic crisis, but there are still challenges ahead. In order to provide mortgage finance, building societies have to encourage people to save more. They seem to be winning that war as well, providing better interest rates on instant access accounts than the big banks such as Barclays, HSBC, Lloyds and Santander.

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First time buyers are already having big enough problems obtaining a contractor mortgage. Just think how bad the situation will become when the universities increase their tuition fees to £9,000 a year.

It has been estimated that students will be graduating with debts of nearly £50,000 after living expenses have been taken into consideration. That’s the size of a small mortgage! The student loan is going to change so graduates will see lower monthly repayments, but spread over a longer time period.

Although student loans will not have to be repaid until a graduate is earning more than £21,000 a year, interest is levied on the loan as soon as it is granted at a massive three percentage points above the RPI. Once the graduate earns more than the £21,000 threshold, their repayment will be 9% of income. Money they would rather be saving for a mortgage deposit.

The size of loans also means students could still owe money after 30 years – longer than the term of an average mortgage!

The government is also considering limiting overpayments or charging early redemption fees so that rich students cannot buy themselves out of their debt. It sounds as if they are making student debt akin to mortgage debt.

The housing market is already struggling. There are fewer first time buyers due to high deposit requirements and stricter mortgage lending criteria. House prices have been dropping and people thinking about moving home delaying their plans. How much worse will the situation become when graduates find they have so much debt on their plate that they can’t get onto the housing ladder?

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Contractor mortgage hunters may be interested to learn that the self-build housing industry has put together an action plan on how self-build could become a mainstream housing option.

Grant Shapps, the housing minister, has welcomed the move by the National Self-Build Association and other sector experts. The report details the main challenges facing the sector and proposes 15 ways to help those who want to build their own property.

It recommends that mortgage lending institutions be encouraged to provide more mortgage products specifically for self-builders, onerous regulations are simplified or removed and more land is made available for self-build properties.

The report suggests that an online portal be set up to provide clear, concise information to people considering self-building.

Shapps said he would consider the proposals carefully and pointed out that he has already written to the major banks and building societies asking them to increase finance options for self-builders. He also said he would look into the practicalities of funding for community self-build projects to kick-start the process.

The chairman of the NaSBA, Ted Stevens, said this is the most positive development the self build sector has seen for about half a century. If we can deliver on the recommendations, the sector could witness significant growth.

Paul Broadhead from the Building Societies Association said he welcomed the action plan and pointed out that self-build could go some way towards addressing the housing shortage which is stifling the housing market in the UK. Getting a mortgage for a self build is often thought of as an arduous, complicated process and hopefully this new report will dispel some of the myths about self-build.

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