'Mortgage apartheid' will blight house sales for years

Sri Carmichael, Consumer Affairs Reporter
25 Aug 2009

Londoners face a "mortgage apartheid" that will blight the capital's property market for the foreseeable future, experts warned today.

As the dust settles on the housing crash, homes are being sold at bargain prices - on average 20 per cent cheaper than at their peak two years ago - but they are off-limits to anyone without a large chunk of cash or equity.

Before the crash, 100 per cent mortgages were common. But a year ago, lenders began demanding far larger up-front payments as the banking collapse squeezed their funds and property values continued to plummet, wiping out deposits.

Industry insiders say the situation has been exacerbated by new international regulations which make it far more expensive and unattractive for banks to lend to those with small deposits.

It means tens of thousands of potential young buyers who are needed to drive a recovery are locked out of the market. Only those with large savings or who can draw on the "Bank of Mum and Dad" can take advantage of low prices and interest rates.

Ray Boulger, of independent mortgage brokers John Charcol, said: "The situation's not going to improve any time soon. In the last year mortgage lenders have put all the emphasis on the size of your deposit.

"Even though house prices appear to be stabilising and the Government has pumped huge sums of money into the economy and financial system to support the banks, they will not begin lending to those with 10 per cent deposits in any hurry because of new international rules about off-setting risk that coincided with the credit crunch called the Basel II accord."

Banks now have to set aside a far bigger "safety net" of capital for big loans - between eight and 10 times as much for a 90 per cent loan as a 60 per cent loan. Since Basel II was fully implemented in January last year, there has been a huge disincentive against lending to cash-poor buyers. There is no sign of that mortgage regulatory structure being reviewed and any changes need to be done at a global level and would take years to implement, Mr Boulger said.

Ed Stanfield, property economist at Capital Economics, said: "If you don't have a deposit of at least 25 per cent you are shut out of the good rates. Under Basel II, if banks lend more than 75 per cent of a property's value the amount of capital they have to set aside to cushion them against a borrower defaulting rises exponentially. It's not a surprise banks aren't lending.

"The credit crunch would have had a massive impact on lending without Basel II, but it has made the situation worse. It will put a brake on the property market's recovery because it works against young buyers coming in."

Richard Donnell of Hometrack said: "You can't have a balanced and functioning market without first-time buyers."

Despite plummeting property values, the average first-time buyer in London is now paying a £50,000 deposit - double that in August 2007. Their deposit as a percentage of their home's value has leapt from 11 per cent to 25 per cent in that period.

Brokers say it is a "nightmare" to get a mortgage if you have a deposit of less than 20 per cent.

James Rodea, of Savills Private Finance, said: "Lenders are rejecting customers, even grade A ones, if they've only got a small deposit. There may be a handful of deals advertised for those wanting to borrow 90 per cent but they are virtually impossible to get." Banks are reserving the best deals for those with at least a 40 per cent deposit.

Peter Hahn, lecturer in finance at London's Cass Business School, said: "Lending may be excessively conservative at the moment but this is a flavour of the reality to come. We need a cultural shift in this country where we accept we should put substantial deposits down if we take on so much debt and that it takes longer to build up the resources to get on the property ladder."

First-time buyers: 10 per cent deposit

Jenni Packer, 26, and Adam Versteeg, 31
£300,000 two-bedroom garden flat in Islington
Joint salary: £60,000-£70,000

Jenni and Adam, both project managers, bought their first home after a “mortgage nightmare” lasting several months.

In February they lost the first flat they put an offer on in Holloway after the Lloyds Banking Group turned them down for a 90 per cent mortgage.

Jenni said: “We had managed to get a fantastic reduction with an offer accepted at £275,000 when the asking price was £300,000. But there were only a handful of mortgages for 10 per cent deposits, all with terrible rates. We could only afford the Lloyds one, and when they rejected us we were devastated.

“They said Adam changing his address so many times in the last few years while he was in the Army had affected his credit score.”

But Savills Private Finance found them a 90 per cent deal from Britannia reserved for university-educated professionals, which they used to buy a Victorian conversion.

The “share to buy” loan — a lifetime discount of 0.2 per cent below the bank's standard variable rate, currently at 4.24 per cent — could not be used to buy ex-local authority or new-build properties and was only available on homes bought by two or more people.

“The day after we signed the deal, they changed the terms so you needed a 15 per cent deposit,” said Jenni.

But Britannia would only lend a maximum of 3.75 times their salaries. Each of them had to find an extra £2,000 from savings and parents.

Late hitch: Mark Lever in Earlsfield

Mark Lever, 30
£220,000 two-bedroom garden flat in Earlsfield
Salary: £30,000-£40,000

Armed with a 25 per cent deposit —£55,000 built up from nearly a decade of saving and a cleverly invested inheritance— Mark could pick from a wide range of competitively priced deals offered by lenders.

“The rates really go down if you have a 25 per cent deposit,” said Mark, who works as a public affairs consultant. “I'd been living in Earlsfield for a few years, watching the market and waiting for my perfect property, letting the money burn a hole in my pocket.

“I almost bought at the peak of the boom in summer 2007 but luckily I was gazumped. Now is a fantastic time to buy with prices and interest rates at all time lows. I found the perfect place in March, a much nicer garden property. I thought I was sorted given my deposit, but it was still difficult.”

Mark had an offer accepted at £220,000 on the two-bedroom Edwardian garden flat in Crealock Street and was thrilled. The Royal Bank of Scotland was theoretically willing to lend him around five times his salary — £165,000 — as his deposit was substantial. Then the lender valued the property at just £200,000, forcing him to borrow an extra £15,000 from his father at the last minute.

“The valuation seemed very low — a way of the bank protecting itself from the market falling further. But I had no way of challenging it as in this slow market nothing similar in the area had sold in the last few months that I could use as a comparison. Luckily my Dad could help and I'm paying him back gradually.”

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