Recent bank inventions for 95% LTV (loan to value) mortgages for first time buyers include the First Time Buyer Save To Buy Scheme which has come about because of fiscal tightening.
Although this is being marketed as a new product for first time buyers, the Save To Buy scheme is really a re-branding of a 40 year old one. Banks used to be run more like modern day cooperatives where the banks loaned money against what you had paid in, rather than the gambling investment banks we see today.
The first time buyer save to buy scheme allows, you, the potential first time buyer, to save a predetermined minimum amount per month with the bank over a set term. By doing this the saver then becomes eligible to apply for a mortgage from the same bank at 95% LTV.
To encourage first timers even more, there is also a tempting cash-back reward of up to £1,000. Savers become eligible for 95% LTV after 6 months of saving. A discount on the mortgage fee is also offered as an inducement.
One of the participating banks said;
“We’ve listened to our customers and we know there is a need for mortgages with a 5% deposit for first-time buyers which aren’t widely available in the market. So with Save to Buy, they can save a deposit with a competitive interest rate and then have access to a 5% deposit mortgage, meaning their first home could be a closer reality than they might think.We’ll also help with those all important home-related expenses with a cash-back savings reward, where the more they save, the more cash-back they earn.”
From the bank perspective this is a genius idea. The best way for banks to replenish funds in their own vaults so that they can gain liquidity is by getting folks to save with them. Secondly, banks know that by tying savings into mortgages they will effectively keep most of the customers main business for many years to come in the majority of cases, because people are habitual in nature and don’t tend to change banks once tied in. Thirdly, banks will appear to be helping first time buyers with the schemes which makes them appear benevolent.
A Note Of Caution
However, in most cases the interest rate on the savings offered is low in comparison to what can be achieved elsewhere. These mortgages are at very high 6% plus interest rates which are also fixed. What happens at the end of the fixed rate? And, as a savings account, the saver can’t remove any money at all. Lastly, banks do not guarantee that you will get a mortgage at the end of it. Equifax states that one in three applicants for a credit cards last year were refused because they had a poor credit rating.
A good credit rating is essential for a better rate mortgage regardless of what first time buyer save to buy scheme is chosen.