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Derin Clark

Derin Clark

Online Reporter
Published: 12/04/2021
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In the month since the Government announced a new mortgage guarantee scheme designed to encourage lenders to offer mortgages to first-time buyers with a 5%, the number of deals available to these first-time buyers has increased, but rates within this market have also risen.

Research carried out by found that between the 1 March and the 1 April, the number of mortgage deals available at 95% loan-to-value (LTV), which requires a 5% deposit/equity, increased by 29, up from five to 34. This increase in deals comes before the Government’s mortgage guarantee scheme fully launched, which is expected to take place this month and should see the number of mortgage deals available at 95% LTV increase further.

Unfortunately for first-time buyers with a 5% deposit, the mortgage rates being offered on these deals are the highest within the market and increased between March and April. On the 1 March, the average two year fixed deal at 95% stood at 3.99% and had increased to 4.47% on 1 April. Meanwhile, the average five year fixed rate at 95% LTV stood at 3.75% on the 1 March, and had risen to 4.32% on the 1 April.

If lenders take up the Government’s mortgage guarantee scheme, it could see average rates at 95% LTV increase further as lenders look to cover the additional costs of lending through the scheme.

Why are 95% LTV rates higher than other mortgage deals?

It is not unusual for the rates on 95% LTV mortgage deals to be higher than those offered by other LTV deals, and this is mainly because a deal at 95% LTV is considered riskier to lenders than lending at a lower LTV. For example, just saving 5% more for a house deposit, resulting in first-time buyers having a 10% deposit and able to get a mortgage deal at 90% LTV, would see average rates on both two and five year fixed deals fall. On the 1 April, the average two year fixed rate at 90% stood at 3.45%, which is 1.02% lower than the average two year fixed rate at 95% LTV. The average five year fixed rate at 90% LTV stood at 3.64% on the 1 April, which is 0.68% lower than the average five year fixed rate at 95% LTV. First-time buyers can see how the different interest rates will impact their monthly mortgage repayments by using our mortgage repayment calculator.

In addition to this, the current economic uncertainty has resulted in some lenders viewing 95% LTV mortgages as riskier than if the economic climate was more stable, which contributed to many lenders withdrawing deals at this LTV at the beginning of the pandemic last year. As such, despite more competition entering the 95% LTV charts, lenders may be unwilling to reduce rates on 95% LTV mortgages until the economic environment becomes more stable.

What other options are available to first-time buyers?

First-time buyers who have the ability to continue saving may be better off waiting until they are able to put down a 10% deposit on their first home, which would result in them being able to get a 90% LTV deal. As highlighted above, average rates at 90% LTV are normally lower than those offered at 95% LTV.

Another option for those with a 5% deposit is to consider a guarantor mortgage deal, which would usually involve a family member putting security against the mortgage. This added security can result in lenders offering lower rates on guarantor mortgages, but it also often means that the family member must risk their asset, usually their home, if the first-time buyer is unable to keep up with mortgage repayments. Those considering a guarantor mortgage can discuss whether this option is right for them and the types of guarantor mortgage deals available by speaking to a mortgage broker.

Alternatively, first-time buyers can also consider buying a home under the Government’s Help to Buy Equity Loan scheme , which is only available to first-time buyers purchasing a new build. Also available to first-time buyers is a shared ownership mortgage – more information about these mortgages can be found here.


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