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Prices are down — but buyers without deposits will struggle

New Halifax research suggests a huge improvement in first-time buyer affordability. But that good news will have a bitter aftertaste for many aspiring buyers, who will realise this year that they have no greater chance of realising their ambition. The outlook in 2010 remains gloomy for those who cannot rely on their parents for a deposit, for example.

What kind of deposit will I need?

A minimum of 15 per cent of the property’s purchase price; the average last year was 22 per cent, according to Halifax. Some lenders, such as Nationwide, are offering 90 per cent loan-to-value (LTV) mortgages. But the credit-scoring process that assesses your ability to meet repayments is now much tougher. It’s unlikely that a first-time buyer will qualify.

So what kind of mortgage am I likely to get?

Do not expect a competitive rate, particularly if you have a deposit of “just” 15 per cent. The Co-Op is offering a fee-free three-year fixed rate of 6.09 per cent, at 85 per cent LTV, and Furness BS has a three-year discount rate of 4.94 per cent, with a £699 fee, at 90 per cent LTV. Melanie Bien, of Savills Private Finance, says much more choice is available if you have a deposit of 20 per cent or more. For instance, if you have a 40 per cent deposit, HSBC is offering a two-year discount at 2.29 per cent, though the fee is an eye-watering £1,499.

Will there be much choice?

More homes could come to the market if interest rates are raised later this year, as more homeowners would be unable to afford their mortgages. But Simon Smith, of Kinleigh Folkard and Hayward, the agent, warns: “If you’re looking at the cheapest properties in an area, there is never going to be that much choice.”

So, is it time to compromise?

No, in this market first-time buyers, like most others, are getting pickier. Lindsay Cuthill, of Savills, the estate agents, says: “Back when everyone could get 100 per cent mortgages, they geared themselves to the limit and bought the most they could afford. But now they are more nervous. They want to know that everything — from the boiler to the wallpaper — is in good condition.”

Can I still get a bargain?

Most asking prices are now more realistic, so your scope to negotiate is limited, especially now the market is improving. But as you are not in a chain, make sure you use this fortunate position to your advantage. Getting yourself in a position where you can move quickly will also help to make you attractive to sellers (be warned, for instance, that mortgage applications now take many more weeks to complete than in the past).

Is shared ownership an option?

The slump in housebuilding and the difficulty of getting funding means that there are fewer “affordable” properties for sale. Under a shared ownership arrangement, you buy part of the property and rent the rest. It’s different from shared equity. Money has recently been brought forward by the Government for more affordable housing schemes, including an extra £278 million announced this week, but this could mean that there is little funding left for the next two years. About two thirds of the £9 billion available for 2008-11 has already been allocated.

Are there other options?

Funding for shared equity is also running short. Under shared equity, you buy the whole of the property with a loan from a lender and an interest-free loan from the developer. Richard Stone, director of Savills’ affordable housing division, said: “There is going to be less of a focus on shared equity in 2010 as the current schemes — MyChoice HomeBuy and HomeBuy Direct — are running out of funds.”

To make it worse, many who would like to buy find that there are even fewer competitive mortgages for these special schemes.

Private developers are coming up with incentives, such as paying stamp duty, to help first-time buyers — or at least convince them to sign up.

Could this situation change?

If the housing market continues to recover, there could be more affordable properties available, as developers would finally be able to build more. But public spending cuts, likely whatever the result of the election, will mean future challenges. Richard Donnell, director of research at Hometrack, suspects that the shortage will continue: “We’re going to have to live on lower rations.”