Updated 08 January 2021
First-time buyers can once again get on the property ladder with a deposit as low as 10%. However, the interest rates they now face may exceed 5%. Are there still affordable first mortgages out there? Article by Nick Green.
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After several months being shut out in the cold, first-time homebuyers can now borrow up to 90% of the value of a property. One of the immediate consequence of the Covid outbreak in the spring was the abrupt withdrawal of the most high loan-to-value (LTV) mortgages, as lenders scrambled to reduce their risk exposure. Nine out of 10 90% mortgages were taken off the market, and 95% mortgages all but disappeared. Now, as the banks start to relax a bit, the 90-percenters are coming out of hiding. But celebrations will be muted, because the deals aren’t exactly generous.
Both Halifax and Lloyds Bank are charging 3.54% for their 90% two-year fixed rate mortgage, with five-year fixes offered at 3.59%. Both also charge an arrangement fee of £995. TSB is offering one at 3.64% (but with no fee), Yorkshire Building Society is offering 3.69% with a £495 fee, and Accord is also offering 3.69% but with a £995 fee. Five-year fixes have higher interest rates (though not by much, and rarely more than 0.1%) and generally have the same fees.
However, even these aren’t the most expensive 90% mortgages out there. Aldermore is asking 5.18% for a two-year fix, plus a fee of £999. Rates have not exceeded 5% since 2013. Deals like these are so much more expensive that borrowers are only likely to resort to them after failing with the bigger lenders – so it is likely that their lending criteria are somewhat less strict.
So much for the most expensive – what about the most generous? The two lowest-interest 90% two-year fixes so far to emerge are from Platform and Nationwide. Platform offers 3.24% with a £1,499 fee, 3.74% with no fee, or 3.34% with a middling £999 fee. Nationwide offers 3.49% with a £999 fee, or 3.74% with no fee. Nationwide also has interesting tracker mortgage options: 3.59% with a £999 fee, or 3.84% with no fee. It’s worth noting that Nationwide has also withdrawn its controversial (and some would say, nonsensical) ban on 90% mortgage customers using deposits that are more than 25% a gift from parents. Now these homebuyers don’t have to prove that they saved up at least 75% of their deposit themselves, which will be a considerable relief.
How do these ‘generous’ mortgage offers compare to the average? The difference is still quite dramatic. For example, an 85% mortgage from the Nationwide (with other criteria being the same) would have only a 2.84% interest rate with a £999 fee – a whole 0.75% difference, or nearly £2,600 in repayment costs over the two years of the fixed term, based on a £200,000 property. So by saving an extra £10,000 in deposit (£30,000 compared to £20,000), the homebuyer saves over £100 per month.
An 80% mortgage from the Nationwide would save even more: a difference of £4,875 over the two-year period, or over £200 a month. So, as welcome as the return of 90% mortgages may be, they also hammer home the old message: the bigger your deposit, the better.
However, it’s not just a case of more deposit always being that much better. For instance, when buying a £200,000 home, having a deposit of £29,000 may not prove to be that much better than having one of £20,000. Certainly there will be some advantages – the size of the loan will be smaller, meaning slightly lower repayments, and the lender may be slightly more inclined to lend to you. However, you’ll still be offered the same interest rates as someone with a £20,000 deposit, because you haven’t crossed the magic 5% threshold.
As a rule of thumb, lenders offer better mortgage rates at every 5% ‘band’ of your deposit. So for instance, a 15% deposit will attract better deals than a 10% one, and a 20% deposit will result in even better rates, and so on. This is why it’s important to think and plan very carefully both when saving a deposit, deciding when to buy, choosing which home to buy, and finally negotiating on price. The 5% rule can make a real difference in affordability, as this example shows:
Rob and Sarah have saved a deposit of £30,000. They’ve had an offer accepted on a £200,000 house and have been offered a mortgage of £170,000. This means their deposit is 15% and their mortgage is 85%. This unlocks the cheaper mortgage deals for them, so they are offered a rate of 2.84%.
This means that Rob and Sarah would have mortgage repayments of around £792 per month.
However, their home purchase falls through on this occasion, so they need to look for another property. They find a house they like even better, but the best price they can get on it is £215,000. This means they’d have to borrow an extra £15,000 – making their deposit now only 14%. It doesn’t seem much, but with an 86% mortgage they are now only eligible for the more expensive mortgage deals.
The best rate their lender will offer them now is 3.49%. This means monthly repayments of £925 – or £133 more than before. Even if they were to borrow the same amount, this higher rate would mean paying an extra £63 a month.
For people already stretching their finances, this extra amount might be difficult to achieve. Even worse, it might cause the lender to reassess whether Rob and Sarah can really afford this mortgage.
To sum up, if your deposit is close to a 5% boundary, it may severely restrict your house-buying budget. Even if you could in theory afford a slightly more expensive house, the mortgage deal bands may place it off-limits for you. Solutions include trying to save more deposit, haggling harder on price to see if your seller will come any lower, trimming your spending further (to improve your affordability) and asking your mortgage broker to try and find a better mortgage rate from another provider.
If you really can’t save enough for a 15% deposit, then you may have little choice but to settled for a deposit between 10 and 15% and take one of the 90% mortgage deals. However, you may not necessarily have to pay the painfully high rates, if you’re lucky enough to be able to call on some backup from your family.
There are various ways in which parents or guardians can help first-time homebuyers that don’t involve stumping up a large lump sum. There are other methods by which the ‘Bank of Mum and Dad’ can help, such as:
A guarantor mortgage is where another person(s) (usually parents) agree to be liable for mortgage repayments if the mortgage holder cannot pay. The guarantors must put up their own assets (i.e. usually their own home or other suitable property) as collateral. This kind of mortgage can enable you to get a 100% mortgage (i.e. no deposit) but if you have a small deposit it can also help you achieve better mortgage rates than you would otherwise be offered.
Another way in which parents might help is via a family deposit mortgage. This arrangement lets parents use some of the equity in their own home as all or part of the deposit for the first-time buyer. This can allow the buyer to raise a higher deposit and access better rates. But, as with the guarantor mortgage, the parents’ home may be at risk if repayments aren’t kept up.
A third way is a family offset mortgage. This may suit parents who do have a lump sum available, but who don’t want to give it away outright to their child who is buying the home. Instead, the money is kept in a bank account linked to the mortgage. This reduces the amount of the loan on which the lender charges interest. For instance, if the loan is £170,000 and there is £20,000 in the offset bank account, interest will only be charged on £150,000 (i.e. £170,000 - £20,000). This reduces the size of monthly repayments. The parents can still access their savings if necessary, though withdrawing money will increase the amount on which the homebuyer has to pay interest.
Although 90% mortgages have made a cautious return, and there are plenty of 95% mortgages around for existing homeowners looking to remortgage, the 95% mortgage is still almost impossible to come by for first-time buyers, unless you use one of the methods described above to obtain help from family. However, at the time of writing there are potentially a handful of such deals available for those able to shop around with the help of a mortgage broker.
Another ray of light for those with low deposits is the proposed new government scheme Generation Buy, which promises affordable fixed-rate 95% mortgages for first-time buyers – eventually. Currently, no details or timescales have been released.
In the meantime, your best chance of securing an affordable and sufficient mortgage is to contact a mortgage broker.
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