First-time buyers used to be able to buy a home with a deposit of just 5 per cent of the market value.
This worked for decades, through good and bad housing markets, largely because of the high loan to value fee, an insurance premium paid by the customer and used by the banks to pass on some of their lending risk through an insurance policy.
Then, during the period of strong liquidity in the financial markets before the banking crisis, it disappeared from mainstream lending. Today, the average first-time buyer deposit is 21 per cent - or £25,000 - according to LSL Property Services, on top of which you have to add transaction costs, lending arrangement costs and legal fees.
As a result, there are very few of these buyers in the market - they just don’t have the capital to fund such a large upfront commitment. By contrast, many would-be buyers are paying more per month on rent than they would in paying the interest on a mortgage.
How can we increase the 200,000 first-time buyers each year to the previous norm of 600,000?
The government is helping by spending £250 million on its FirstBuy scheme to provide first-time buyers with long-term loans to support deposits. This is welcome, but no more than a short-term solution.
Housebuilding companies have stepped in with the idea of bringing back mortgage indemnity insurance, providing the lenders with insurance to cover potential future default losses and reduce the capital they have to allocate to high loan to value mortgages.
It works by the lenders providing 95 per cent loans to housebuilder customers at sensible rates of interest, the lender dialling in to their internal models the benefit of the insurance provided by the housebuilder.
All parties benefit in this return to what previously was the norm - the lender lends to more customers in a manner acceptable to its risk committee, the housebuilder sells to more customers who can afford but do not have a lot of capital, and the customer gets on the property ladder with a 5 per cent deposit and a credible cost of borrowing.
Bovis Homes is offering its customers a product called ‘Perfect 10’ through which, with a 10 per cent deposit, they can buy a Bovis home by qualifying for a mortgage from the Woolwich.
We are able to do this with a fixed interest rate of only 3.79 per cent because we provide the Woolwich with a mortgage indemnity insurance policy and pay the equivalent of the high loan to value fee.
But to make this and similar models work for more first-time buyers, two things have to happen.
First, lenders must be willing to finance schemes so that they require no more than a 5 per cent deposit requirement from the customer.
Second, more banks need to sign up to give the customer a wider choice.
This innovation is by no means a silver bullet but it will certainly go a long way to helping first time buyers get that all important foot on the property ladder.
David Ritchie is chief executive of Bovis Homes