Mortgage Lenders Truly Go to War

Mortgage rates are continuing to fall with another lender launching a 1.99% two-year fixed rate deal for customers with a 40% deposit.
Yorkshire Building Society launched the deal last week with an offset mortgage available at 2.19%. Both products come with a £995 product fee.
Last year Tesco, HSBC and Santander all launched two-year fixed rate deals. Tesco was forced to withdraw its rate in October because high demand meant it filled its allocated funding for the product. 
With funding still scarce lenders are increasingly competing for credit-worthy borrowers with large deposits. Competition is not the only reason and the low rates are partly driven by public policy decisions. The Bank of England base rate has been at its record low of 0.5% since 2009 and it is expected to remain at ultra-low levels for years to come.
The Government has also launched its funding for lending scheme, which is intended to act as a catalyst for even cheaper rates and more mortgages overall. 
The scheme offers banks ultra-cheap funding to pass on to customers in the form of business loans and mortgages. It is already leading to further downward pressure on rates as lenders rush to attract the prized high deposit customers.
The competition for these customers combined with record low base rate and funding for lending has led to the cheapest rates in history. 
When using mortgage calculators to find out how much can be borrowed it is worth remembering that that rates will drop significantly with large deposits for credit-worthy borrowers.
For first-time buyers using mortgage calculators is more important as high deposits are the key obstacle to getting a mortgage. Buying a home with a 5% deposit is far more expensive and has more restrictive criteria, reflecting lenders concerns that they can be repaid and regulatory requirements. However, there are signs that innovative new deals are coming to the market to help people get their foot on the housing ladder.
New figures from Barclays this week show the average first-time buyer needs to save for eight years before they can buy. In response the bank has launched a mortgage with a 5% deposit aiming to help parents help their children without having to tie-up the large deposit in property.
The ‘family springboard’ mortgage allows family members to use their savings to help a first-time buyer purchase a home.
Family members must deposit 10% of the value of the property into a Barclays savings account. After three years the money is returned to the family member and if all mortgage payments are met it will receive an annual interest rate of Bank of England base rate plus 1.5%.
It is not risk-free because if mortgage payments are missed then the money could be taken by the bank.
But unlike a traditional guarantor mortgage the family member is not named on the mortgage and only the 10% deposit money is at risk.
The deal will be available from Barclays on 14 January. It is fixed for three years at 4.69% and reverts to a lifetime tracker at Bank of England base rate plus 3.99% with a £499 fee.
Simple mortgage calculators will only tell you what you can borrow and not delve into more innovative first-time buyer solutions.
The Government has also launched a number of first-time buyer schemes such as NewBuy which offers anyone the chance to buy a new-build home with a 5% deposit. 
The scheme insures lenders against any possible losses meaning they can offer customers a lower deposit. It is aiming for 100,000 new homes to be built through its guarantees by 2015.
The Government is also planning more funding for the FirstBuy scheme which allows aspiring homeowners to buy a stake in a property rather than forking out for a full deposit.
They then share the equity in the house with the Government. This shared equity scheme has proven very popular and the Government is pledging to extend it further.
These deals show the different dynamics at play in the current UK mortgage market. For those with large deposits there record low rates on short-term fixed deals. For first-time buyers lenders are trying to work through the hurdle of a deposit to get on the first rung of the ladder.