Call and Put Options

When Chancellor Alistair Darling unveiled his first Pre-Budget Report this month, the bulk of the media attention fell on changes to the capital gains tax, a hike in the inheritance tax threshold and the absence of any such increase with regards to stamp duty.

But Mr Darling also emphasised, as he had done earlier this year, his intention to encourage more lenders to offer long-term fixed-rate mortgages. Back in July, the chancellor said that such changes would offer more security to those looking for a first time buyer mortgage as well as reducing the arrangement fees imposed when remortgaging.

According to the chancellor, next year will see the government provide assistance to lenders to help them offer more long-term deals, but he did not go any further than that in explaining what form this help would take.

But the question those looking for a first time buyer mortgage should ask is whether or not such a deal is actually beneficial for them.

While these borrowers would be able to avoid the previously mentioned arrangement fees, there are other costs that could offset this advantage, as Michael Coogan from the Council of Mortgage Lenders (CML) recently outlined.

“There is a key trade-off for borrowers in choosing a longer-term fix, relating to the potential costs of exiting the deal early, and this is the key feature that needs to be addressed to stimulate mainstream consumer appetite,” Mr Coogan cautioned.

Industry opinion is mixed, with broker John Charcol sceptical over whether demand will ever exist, but others such as Abbey advising otherwise.

“Nearly 40 per cent of homeowners Abbey surveyed recently said they would opt for a fix of five-years or longer if they were remortgaging tomorrow,” commented Nici-Audhlam Gardiner

“That’s almost the same as the number of people who would opt for a two-year fix – previously the most popular type of product,” Ms Audhlam Gardiner added.

That’s not to say two-year fixes aren’t popular, and those looking for the best first time buyer mortgage often find themselves turning to such products, especially at a time when firms such as Abbey themselves are cutting rates.

The lender announced last week that its two-year and its five-year fix would be reduced by 0.1 per cent and up to 0.15 per cent respectively, indicating that the deals are still there on the market. Alliance & Leicester, for example, has also just cut rates on three and five-year deals.

Again though, just as long term deals aren’t necessarily the best option, neither are fixed-rates. Katie Tucker from John Charcol put in simple terms, speaking to the Daily Telegraph.

“If you think the Bank of England base rate will fall, a tracker or discounted-rate is suitable,” Ms Tucker commented.

“If you prefer to be protected from any potential increases, a fixed-rate is the answer, she added.

But with the choice available and the frequent alterations that take place, turning to a mortgage advisor for help might be wise. The options are now many and varied, ranging from shared ownership to co-buying, and it’s worth considering each one on its merits.

Something like shared ownership, which allows a borrower to purchase a stake in their home, or co-buying (essentially buying jointly with a friend or relative), will likely become especially popular in the future as the credit crunch hits much of the market.

According to the latest figures from Moneyfacts, the number of mortgages available has fallen by 40 per cent in the last three months. MoneyExpert.com, furthermore, has said that there has been a 60 per cent increase in the number of people who have had applications turned down in the past six months.

How long the current state of affairs will last is as-yet unknown, but if nothing else such trends emphasise the fundamental necessity of both saving and seeking advice before deciding on exactly what is the best first time buyer mortgage deal for you.