Magnificent mortgages with a 5% deposit

Believe it or not, you can get on the property ladder even if you only have a 5% deposit.

When the bottom fell out of the economy in 2007, many would-be first-time buyers waved a metaphorical goodbye to the prospect of ever owning a home.  But a fresh look at the same problem could uncover some pleasant surprises. Perhaps getting on the property ladder is feasible after all. Here are five reasons why:

1) There IS a 95% mortgage market

It is no longer the case that the absolute minimum deposit required by lenders is 10% of the property price. According to lovemoney.com partner Moneyfacts, there are now seven that offer mortgages on a national basis exchange for a 5% deposit. These are Clydesdale and Yorkshire banks (the same lender) and Melton Mowbray, Ipswich, Saffron, Shepshed, Skipton and Mansfield building societies.

None of these 95% deals are shared equity schemes and none require input from your family, such as surrendering their savings to the lender or putting up their own home as security. They are all just regular mortgage deals.

Here are some of the best 95% loan-to-value (LTV) deals available right now:

Source: Moneyfacts.co.uk 18.10.11

2) Rates are reasonable – and coming down

Mortgage rates on 95% deals are not expensive in their own right. They only appear that way when compared to what today’s equity-rich homeowners are paying.

For example, in exchange for a 5% deposit, Melton Mowbray Building Society is offering a three-year fixed rate priced at 5.09%. While this is nothing like the lowest fix on the current market (a 1.99% two-year deal from Leeds with 35% deposit) it is spectacularly cheap when set against a more typical interest rate environment.

In May 2007 for example, when base rate sat a still-reasonable 5.5%, one of the best two-year fixes available (in return for a 40% deposit and excellent income and credit score) was priced at 5.25% from GMAC. This is 0.16 percentage points higher than Melton Mowbray’s 95% deal, which puts things into context.

What’s more, the cost of high loan-to-value mortgage deals is falling.  Last week for example, Yorkshire and Clydesdale banks reduced rates on their 95% three-year fix from 6.99% to 6.19%.

3) House prices haven’t moved, giving you a chance to save

Before the credit crunch, saving for a deposit on your first home was a race against rampant house price inflation. But this is one problem today’s first-time buyers don’t have to contend with. 

According to the latest figures from Halifax, the price of an average property dropped by 0.5% in October from the previous month, and sits at 2.3% lower than this time last year. The bank’s housing economist, Martin Ellis is not forecasting a reversal of this situation any time soon due to weak earnings growth, higher inflation, increases in taxes and general economic uncertainty.

The upshot is that to raise a 5% deposit on average property, today’s first-time buyer needs to save a reasonable £8,050, plus associated fees.

4) Arrangement fees are low

Surprisingly, arrangement fees are comparatively cheap on 95% mortgages, as the deals are targeted at cash-poor first-time buyers with no equity in an existing property. Clydesdale and Yorkshire Banks for example, charge an arrangement fee of £599 on their 95% deal, while Skipton Building Society is even cheaper, applying a booking fee of just £195.

5) You have options

Today’s generation of first-time buyers are also more pitied those who have gone before them, and subsequently have more support at their disposal.

FirstBuy Direct for example, which was launched by the government in the 2011 Budget, is designed to help those struggling to get a footing on the housing ladder. 

The scheme, which applies to new-build homes, requires first-timers put down a 5% deposit, but then allows them to borrow an additional 20% as an equity loan (interest-free for the first five years) from the government and participating property developer.

This leaves the first-timer to seek out a 75% loan-to-value mortgage instead, which comes with cheaper interest rates.  When the property is sold, they will repay the 20% equity loan relative to its value.

Lloyds TSB’s Lend a Hand mortgage requires a 5% deposit if a ‘helper’ can surrender savings to the bank that amount to a further 20% of the property value.  Armed with this additional security, again, the first-timer can benefit from mortgage rates applicable to a ‘less risky’ 75% loan-to-value mortgage.

Be warned...

However, all this good news comes with a caveat – which is that the risk of being rejected when applying for any high-loan-to value mortgage deal is high.

According to mortgage broker Andrew Montlake, a lot of lenders are playing the PR game by offering 90% or 95% mortgages. But in reality, a lot of applicants are not qualifying for the deals as lenders tweak the credit score criteria accordingly to control levels of business.

That’s why it’s good idea to talk to a broker before applying for a 5% deal - they should be able to tell you in advance whether you have a decent chance of qualifying for a particular deal.

More: Use lovemoney.com's fee-free mortgage comparison service or online search | Ten steps to finding a mortgage | Save money with a tracker mortgage

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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 freephone 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.