The launch of the Government’s mortgage guarantee scheme last week saw a significant rise in mortgage deals available for those with a 5% deposit, but although this has offered more choice for mortgage borrowers with a small deposit, the rates being offered mean that buyers should carefully consider all options before locking into a 5% deposit mortgage deal.
Mortgage borrowers with a 5% deposit will need to look at mortgage deals available at a 95% loan-to-value (LTV).
The number of 95% LTV deals has increased significantly over the last week, as the launch of the Government’s mortgage guarantee scheme saw many high street lenders, such as NatWest and Royal Bank of Scotland, re-enter this market after withdrawing many of their 95% LTV deals during the first lockdown last year. As the below table shows, between April 2020 and April 2021, the number of deals available for those with a 5% deposit fell by 128, from 162 to 34. Now the number of deals stands at 112, an increase of 78 since the start of the month.
Meanwhile, the average rate on a 95% LTV deal has increased year-on-year, with the average two year fixed rate rising from 3.47% in April 2020 to 4.47% in April 2021 and the average five year fixed rate increasing from 3.90% to 4.32% during this same period. The increase in deals into this market, however, has seen average rates fall this month and now the average two year fixed rate stands at 4.02% and the average five year fixed rate stands at 4.17%.
|95% LTV mortgage market|
|March 2020||April 2020||April 2021||26 April 2021|
|Number 95% LTV fixed and variable rate products||391||162||34||112|
|Average two year fixed rate||3.26%||3.47%||4.47%||4.02%|
|Average five year fixed rate||3.58%||3.90%||4.32%||4.17%|
Although the slight fall in average rates, along with the increase in deals to choose from in the market, is good news for borrowers with a small deposit, when taking into account other factors such as rising house prices and the affordability of monthly repayments, could result in those with a small deposit still struggling to buy a home. For example, the average house price now stands at £232,134, which would require a 5% deposit of £11,607 to purchase. A buyer locking into a two year fixed deal at a rate of 4.02% on a 35-year term would have monthly repayments of £1,166.46, while those locking into a five-year deal at a rate of 4.17% on a 25-year term would have monthly repayments of £1,184.82 – borrowers can see how much their mortgage repayments will be using our mortgage repayment calculator. Depending on the income of the household, these repayments may be considered unaffordable by some mortgage lenders.
As such, those considering a mortgage at a 95% LTV should carefully compare deals, including considering deals outside the Government’s scheme as these might offer better rates. “Indeed, of the 112 deals now on offer at 95% LTV, 72 do not sit inside of the mortgage guarantee scheme,” explained Eleanor Williams, finance expert at Moneyfacts.co.uk.
It may be worthwhile for borrowers with a small deposit to speak to a mortgage broker, who will be able to take into consideration the borrower’s personal circumstances and highlight the best deals available for them.
Borrowers with a small deposit who are able to continue saving may want to consider waiting until they have saved enough for a 10% deposit, which would enable them to get a deal at a 90% LTV.
Our research has found that there are currently 480 deals available at a 90% LTV, significantly higher than the 112 95% deals on the market today. As well as this, average rates on a 90% are lower than that being offered on 95% LTVs, with the average two year fixed rate standing at 3.42%, 0.60% lower than the equivalent average 95% rate, and the average five year fixed rate standing at 3.63%, 0.54% lower than the average 95% rate for this term.
Williams revealed: “Affordability may remain a concern with borrowers regardless of the new scheme and generally consumers will find much more choice and lower rates if they can stretch their deposit to 10%. Borrowers could see a significant difference in monthly repayments by choosing a 90% LTV deal, saving as much as £1,486 over two years or £3,379 over five years on a 90% LTV deal compared to a 95% deal on average*. Whether borrowers need to put their immediate plans on hold to achieve this will depend on their circumstances of course.”
If you are saving for a deposit for your first home you may want to consider saving into a Lifetime ISA, which includes a 25% Government bonus on deposits. There are restrictions with these ISAs, however, so you should first read our guide on Lifetime ISAs before opening an account.
Alternatively, first-time buyers can consider using the Government’s Help to Buy scheme to purchase their first home. This scheme enables first-time buyers to borrow up to 20%, or 40% in London, of the cost of a newly built home. Under the scheme, the buyer must pay a minimum 5% deposit for the home, which with the 20% Help to Buy Loan, means that borrowers need a minimum 75% Help to Buy mortgage to fund the remaining cost of the home. The Help to Buy loan is interest-free for the first five years and then interest fees start at 1.75% and rise each year in April by the Consumer Price Index plus 2%. As well as this, borrowers are charged a monthly management fee of £1 for the term of the loan. There are price caps on how much properties can cost under the scheme, which can be found here.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. Moneyfacts.co.uk will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.