First time buyer mortgage rates not falling with lenders' costs

22 September 2009 / by Rachael Stiles

First time mortgage customers are continuing to get a raw deal as interest rates stay high despite the falling cost of funding for lenders, has said.

As competition among lenders remains low, would-be homeowners seeking a first time buyer mortgage deal have only benefitted from a 0.12 per cent drop in the average mortgage rate for those with a 10 per cent deposit.

Meanwhile, the base rate has plummeted, and Moneyfacts' analysis has found that lenders have enjoyed a 4.35 per cent fall in the cost of funding, but they have failed to pass this on to many of their customers.

Competition for first time buyer mortgage business has fallen by the wayside as avoiding risk has taken priority, with borrowers who hold a 40 per cent deposit seeing rates fall by an average 1.86 per cent.

In real terms, the average fall in rates has saved buyers with a 40 per cent deposit as much as £165 a month on a £150,000 fixed rate mortgage, but first time buyers will have seen a monthly saving of just £11, Moneyfacts has calculated.
"A higher margin for risk is expected on a 90% LTV deal, but a 4.25% margin over the cost of funding seems excessive and difficult to justify," said Michelle Slade, spokesperson for

"Two years ago, rate-driven competition led to 90% LTV deals being some of the most attractive rates on the market. Today, a 25% deposit remains the level where most lenders are willing to do business. Anything smaller than this and borrowers will pay a hefty price."

First time buyers were once the "lifeblood" of the property market, she continues, but are now being passed over for lower risk customers.

While some lenders advertise rates of less than two per cent, Ms Slade cautions that there is no way of telling how many borrowers will qualify for such deals, and the risk is that once they are temped in by the low rates they will be offered much higher ones.

Ms Slade added: "It appears borrowers searching out a new deal are paying a higher price to subsidise existing customers, many of which are paying record low rates."

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