Competition is creeping back into the mortgage market, allowing first-time buyers on to the property ladder with much smaller deposits. Not only are lenders relaxing loan-to-value (LTV) restrictions, they are offering borrowers incentives such as free legal fees and home insurance.
Lloyds TSB's Lend a Hand mortgage now requires a deposit of five per cent and offers a rate of 4.79 per cent, which had been available only to borrowers with a deposit of at least 10 per cent.
Yorkshire Building Society has announced that it will lend first-timers up to 90 per cent LTV, up from 85 per cent, and is also dangling a package of fee waivers and sweeteners worth £2,500.
Nationwide has revamped its range of first-time buyer mortgages and has special offers including cashbacks and refunds of survey and legal fees. Co-operative Bank has halved the fees and reduced the rates on its 90 per cent LTV fixed-rate mortgage range. The two-year fix is now 4.99 per cent, with a fee of £499.
But buyers with bigger deposits still get the best deals
There are about 20 mortgage deals now which allow people to borrow up to 95 per cent LTV. This compares with six deals a year ago - and 970 in July 2007. A buyer with a 10 per cent deposit has a lot more choice - there are 174 products open to them, compared with 77 a year ago and 763 three years ago. The average pay rate for first-time buyers is 4.55 per cent.
Hannah Mercedes Skenfield, of website moneysupermarket.com, says 100 per cent mortgage deals are "still a long way off", though Nationwide offers a negative equity loan to first-time buyers who bought at the market peak and now want to move. The building society will lend 95 per cent of the price of the new property, plus a further 25 per cent to cover their negative equity.
So, someone wanting to move from a £200,000 property with a mortgage of £220,000 would be £20,000 in negative equity. If they wanted to trade up to a home costing £250,000, the Nationwide loan would allow them to carry forward the £20,000 negative equity, and lend them 95 per cent of the £250,000 required to buy the new home, producing a total loan of £257,500 - £7,500 more than the new property's value and 125 per cent LTV.
The sting in the tail is the interest rate, either 6.38 per cent or 7.68 per cent for a two-year or five-year fix, with extra (up to 8.18 per cent) for the top-up loan. Moneysupermarket.com says up to 40 per cent of people looking for a home loan have a deposit of less than 25 per cent. With interest rates at rock bottom, it is wise to think carefully about the type of mortgage you take out - to cushion yourself against payment shocks.
You can avoid a nasty rise in your repayments when interest rates do rise by choosing a fixed-rate home loan. Although these mortgages tend to be more expensive than variable-rate trackers (which are linked to the Bank of England base rate, currently 0.5 per cent), you can pay less than four per cent for two-year fixes. If you want longer-term certainty, Yorkshire Building Society is offering 4.99 per cent fixed for 10 years.
Currently there are 1,814 mortgage deals available to first-time buyers
You are more likely to get a mortgage if you have a savings record with a particular lender. Mortgage brokers stress that they can find you the best deal, but not all loans are available through brokers. HSBC, which has some of the most competitive rates, does not work with brokers. Borrowers have to apply direct. Study the "best buy" charts and comparison websites.
If at all possible, use any disposable income you can spare to overpay your mortgage each month. This will reduce the outstanding amount and give you more equity - and buyer power - when you move. And remember you can boost your income by taking in a lodger - up to £4,250 a year tax-free under the Government's "rent-a-room" scheme. The average first-time buyer needs 4.4 years' income before tax to buy their first home, according to Nationwide, whose average "price to earnings" ratio since 1983 is 3.3, suggesting budgets are stretched despite low interest rates.
Housebuilders are stepping in to help buyers where big deposits are a stumbling block. Rachel Suckling (left), who works as a secretary for a Mayfairbased company, had been living with her parents in Dartford. She was able to buy a two-bedroom flat in Greenhithe, Kent, by taking advantage of a 15 per cent deposit top-up from developer Fairview.
The asking price of Rachel's flat, in the Thames Waterside development, was £189,000. She used savings of £9,450 and the developer contributed £28,350, which has to be paid back within 10 years or on resale of the property. With a 20 per cent downpayment, she was able to get a mortgage.
"Getting help with the deposit made all the difference, otherwise I'd still be living with my parents," says Rachel. "If I need extra income I can rent out a room." It takes her 40 minutes to commute to London Bridge, from where she gets the Tube to Mayfair.