Get a mortgage with a small deposit

A succession of lenders have targeted borrowers with small deposits by launching high-LTV mortgages. But are they any good?

It’s not been an easy few years for first-time buyers. Despite rates dropping for those with hefty deposits, lenders have still been reluctant to overly commit to lending to borrowers with small equity levels. It seems the subprime ghosts of Northern Rock have not been fully exorcised from the corridors of UK lenders quite yet.

Despite this finance timidity, high loan-to-value (LTV) lending did increase across 2011. And this in turn boosted the number of new buyers entering the market.

High LTV deals on the up

The latest e.surv Mortgage Monitor shows that a third (32%) more loans with a deposit of 15% or less were granted in 2011 than in 2010 – up to 57,301 from 43,379.

This increase pushed up the average LTV of a first-time buyer mortgage from 66% in December 2010 to 69% in December 2011. Overall, the average deposit level fell from 41% to 38% across the 12-month period.

Purchase approvals in December were also up 19% year-on-year.

Limited availability

The data comes in the same month as a Bank of England survey stating that lenders were preparing to launch more low deposit mortgages. These would be directed at the struggling first-time buyer sector.

However, in a seemingly contradictory statement, the Bank also warned that ongoing economic instability could tighten credit availability. And that as a result, these new high LTV deals may only be accessible by those with the best credit ratings.

How to make yourself attractive to lenders

If you are planning on applying for a high-LTV mortgage anytime soon, the first thing you’ll need to do is make sure your credit record is in good shape. Lenders use this history as a key indicator of your financial worthiness, so it’s important to pay attention to it before you go anywhere near a mortgage.

You can get a copy of your credit record by taking out a free trial with Experian Credit Expert. But make sure you cancel within 30 days if you don’t want to pay a monthly fee.

Initially you should ensure all of the information on the report is accurate. Contact the agency if there are any mistakes. Correction notes can also be added in order to explain any defaults or missed payments.

Making sure you’re on the electoral register is another vital step as it provides a hard-copy of your contact details for the lender and suggests a level of social stability.

How to stand the best chance of getting a mortgage has some further tips on sprucing up your appearance to lenders.

Buying for the right reasons

Before you even consider a small deposit mortgage, you need to be sure that you’re buying for the right reasons. In the current tight financial climate, high-LTV deals can provide a vital leg up onto the property ladder for many first-time buyers. But that’s not to say they can’t go wrong.

Negative equity is a major risk. Put simply, if you borrow most of the money you need to fund a property purchase and then prices drop, you could find your loan outstripping the value of your house. This makes moving or remortgaging very tough.

However you can limit this risk if you stay in your property for a long period of time. That way, even if house prices do fall, chances are you’ll have built up a sufficient level of equity in your property to offset the drop.

But this requirement to stay put for a long period of time will dictate what property you ultimately go for. So think ahead: Where will you be in five to seven years' time? How much space will you need? Will the location still be suitable?

You may find after asking yourself these questions that buying that one-bedroom flat at 90% loan-to-value stops looking like such a great idea.

The best deals around at the moment

If you do decide a high-LTV mortgage is right for you, your best bet is to get a feel of the market and then speak to a broker. I’ve highlighted some of the best current deals currently around in the table below.

You’ll be able to get a two-year fix with HSBC at 90% LTV for 4.69% or for five years at just 4.89% - both with no fees. HSBC’s tracker range is also worth a look. A lifetime tracker, again at 90% LTV and with no fees, is priced at 4.09% above base rate (initial rate 4.59%­).

Nationwide is the only major high street lender offering 95% mortgages to new customers. However, to be eligible for these deals first-time buyers must have been saving for at least six months into a ‘Save to Buy’ account. This is a regular savings account offering 2.5% on balances up to £20,000. There is a minimum deposit of £50 which must be paid in for at least nine months throughout each rolling 12-month period.

If you do then go on to take out a 95% LTV deal, a cashback reward is offered. This ranges from £250 for those who have saved between £2,500 and £4,999 to £1,000 for balances over £10,000.

These 5% deposit deals are priced at 6.14% for a three-year fix and 6.54% for a five-year fix. Both have a £999 fee, though fee-assisted products are also available.

15 fantastic low deposit deals