Buy a house with a 10% deposit

If you only have a small deposit, these new deals are worth a look.

If you want to buy a property, but have only a small deposit, it can feel pretty daunting. After all, the national press is full of gloom about how lenders are not interested in first-time buyers.

However, recent weeks have seen two tremendous, innovative new mortgages launched which should appeal to all borrowers with a deposit of only 10%.

Taking advantage of base rate

As we all know, bank base rate has sat stubbornly at its current record low of 0.5% for more than two years now. And incredibly, it looks increasingly likely that it will not be moving from that level for some time to come, despite of the painful inflation figures.

All of that makes a tracker rate mortgage all the more attractive. Because these rates are tied so closely to base rate, the initial rates on offer are astonishingly attractive, compared to their fixed rate counterparts. Obviously, this is because of the gamble you take that rates will not rise to unaffordable levels.

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But one new tracker mortgage for borrowers with small deposits even has you covered if they do!

The droplock

Yorkshire building society has launched a two-year droplock tracker mortgage, at a competitive rate of 3.99% (base rate plus 3.49%) and a fee of just £495.

As you can see from the table below, the fee and rate of this mortgage sets it apart from its rivals, but it’s the droplock feature that I’m a big fan of.

The biggest danger with a tracker mortgage generally is that rates may rise faster than you were expecting, leaving you with unaffordable mortgage repayments. At this point you may want to remortgage to a fixed rate deal, which may be more affordable – however, you may face early repayment charges to do so. And these can come to many thousands of pounds, leaving you in a sticky situation.

However, a droplock mortgage allows you to remortgage to a fixed rate deal from the same lender, without having to pay a penny in early repayment charges. So this Yorkshire deal allows you to have your cake and eat it – you can enjoy the low interest rate, but if you start to feel that a fixed rate would be a better option, you can switch without having to pay for the privilege (though product fees may apply).

For more on droplocks and why they are a smart move, have a read of The most flexible mortgage in the UK!

The safety first approach

However, I have long made plain my preference for longer term fixed rate mortgages, particularly for first-time buyers.

From a practical point of view, knowing how much you’re going to be shelling out on your mortgage each month, free from uncertainty, is always welcome. That’s especially true if you have not had a mortgage before, and are buying your first property – there are all sorts of new and unexpected costs that will pop up along the way, so knowing that at least one bill will stay consistent is a good thing.

Negative equity

There is one clear danger to buying at such a high loan-to-value, particularly when the housing market is in such a sluggish state as it is now, and that’s negative equity.

This is where the money you owe on the mortgage is greater than the value of the property. So if you still owe £150,000 on your mortgage, but house price falls mean that your property is now only worth £130,000, you’re in negative equity to the tune of £20,000.

John Fitzsimons busts some myths about negative equity, and explains how best to get out of it

This is problematic, as it means that moving becomes extremely difficult – you’ll need to find £20,000 on top of what the buyer pays you (assuming they pay what the property is worth) just to clear your mortgage debt, and that’s before you take into account the cost of buying your new home, and the deposit you will need to do so.

It can also make remortgaging difficult, as you will not be able to remortgage for the full value of the property.

In other words, negative equity can turn your home into something of a prison.

Buying for the right reasons

With all that said, the hysteria that surrounds the risk of negative equity is somewhat overblown in my view. If you buy a property for the right reasons – in other words, because you want to live there for an extended period of time – then negative equity is not such a terrible problem. Sure, you may be in negative equity in a year’s time, but five or ten years down the line chances are you will have paid off enough of your mortgage debt that you are out of that particular hole.

With house prices likely to fall over the next year or so, it just emphasises the importance of picking the right property for you and your family for the longer term, not just as a place to live for a year or two before moving elsewhere.

16 tremendous 90%+ mortgages

Lender	Term	Interest rate	Maximum loan-to-value	Fee
Yorkshire BS	Two-year fixed rate	4.79%	90%	£995
National Counties BS	Two-year fixed rate	4.99%	95%*	£495
Barnsley BS	Two-year fixed rate	5.19%	90%	£0
Yorkshire BS	Three-year fixed rate	5.39%	90%	£995
Britannia BS	Three-year fixed rate	5.59%	90%	£999
Nationwide BS	Three-year fixed rate	5.69%	90%	£400
Skipton BS	Three-year fixed rate	5.79%	90%	£195
Yorkshire BS	Five-year fixed rate	5.59%	90%	£995
Britannia BS	Five-year fixed rate	5.89%	90%	£999
Skipton BS	Five-year fixed rate	5.89%	90%	£995
Yorkshire BS	Two-year tracker with droplock	3.99% (base rate + 3.49%)	90%	£495
Skipton BS	Two-year tracker	4.88% (base rate + 4.38%)	90%	£995
Post Office	Two-year tracker	4.89% (base rate + 4.39%)	90%	£995
Santander	Two-year tracker	4.99% (base rate + 4.49%)	90%	£495
Halifax	Two-year tracker	5.09% (base rate + 4.59%)	90%	£0
HSBC	Lifetime tracker	4.69% (base rate + 4.19%)	90%	£0

More: Lenders preventing mortgage transfers | House price indices are a waste of time

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.