Buy Your First Home For Less

Buying your first home can be very expensive. Here's a clever trick to help you cut the cost.

House prices appear to be slowing down at the moment, but many potential first-time buyers still can't afford to get on the ladder.

And even if they can afford the asking price for their starter home, they still need to pay mortgage fees, put down a decent deposit and fork out for stamp duty. In August, The Royal Institute of Chartered Surveyors (RICS) reported the cost of buying typical home runs to £25,600. Gulp!

If it's going to set you back that much upfront, wouldn't you like to trim back the costs as much as you can?

One trick is to look at the size of your deposit. Surprisingly, smaller deposits can sometimes means lower fees.

Let me explain..... 

Nowadays first time buyers are normally encouraged to save up a 5% deposit, at least, before even contemplating purchasing a home.

In the past, buyers were expected to stump up a 25% deposit. Since this is no longer feasible for most first-timers, lenders will now allow us to borrow more, but only if we pay for the privilege. Yes that's right -- another fee!

This particular fee is known as the Higher Lending Charge (HLC). Typically the HLC will only apply if you wish to borrow more than 90% of the property value. In other words, as long as you have a 10% deposit, you'll escape the charge.

Not all lenders will charge an HLC but if you're borrowing over 90% and up to 95% of the property value, around one-third will. And the HLC can be pretty hefty. If, for instance, you want to borrow 95% of a £150,000 property, you could find yourself hit with an HLC between £1,350 and £2,700 depending on your chosen lender.

What's The HLC For?

Essentially the HLC protects the lender. The more you borrow in relation to the property value, the greater the risk you represent to the lender. The HLC compensates for that added risk. The fee may be used to purchase an insurance policy which safeguards the lender from financial loss in the event of you defaulting on your repayments.

Typically the HLC will equate to roughly 1.6% of the amount you're borrowing, but this does vary widely. You'll usually have the option to pay it upfront or add it to your mortgage loan, although if you do that you'll end up paying interest on it as well.

Generally you'll have to pay a higher interest rate because you're putting down a smaller deposit anyway, but if you also get stung with an HLC, you're effectively being penalised twice. And you'll find many of the more competitive deals amongst the 95% mortgage market include an HLC. In fact, of the top 20 two-year fixed rate loans which allow you to borrow 95%, 12 impose an HLC, so it's not easy to avoid this extra charge and enjoy lower rates of interest.

The HLC Trick

But there is a way around this conundrum. Although roughly one-third of lenders apply HLCs on 95% mortgages, those who offer mortgages over 95% often don't. I've looked at hundreds of mortgage products which offer mortgages between 96% and 100%. Astonishingly only a handful of lenders, including the well-known Royal Bank of Scotland, NatWest Mortgages and Halifax, impose an HLC on these specialist loans.

This leaves a rather odd anomaly where HLCs only appear with any regularity when you are borrowing over 90% and up to 95% of the property value. But, crucially, put down less than a 5% deposit and the HLC all but disappears. Considering the apparent purpose of the HLC is to protect the lender from a greater risk, it's certainly bizarre the charge doesn't generally apply to the most risky of mortgages. Ray Boulger, of online mortgage service Charcol, suspects this is simply a means of attracting business in this arena, which has led most lenders to routinely avoid HLCs. 

So what does all this mean to you?

Well, let's say you've saved a 5% deposit. But before you hand over the entire sum, take a look at the following tables. Let's assume you want to buy a home valued at £150,000 and you have a 5% deposit of £7,500. If you go for the most competitive two year fixed rate deal (with no extended early repayment charge) you'll pay interest at a rate of 4.99% with Chelsea Building Society.

But alongside a valuation fee and a large product fee, you'll encounter an HLC of £2,475. This means the total cost per year of this particular deal is £13,148. If you compare that to the most competitive 96% mortgage, although you'll have to pay a higher interest rate of 6.60% with Standard Life Bank, there's no HLC and with lower fees, the total cost per year is over £1,000 less at £12,098. What's more, if you're running out of cash you'll only need a deposit of £6,000 which saves you another £1,500. So, in this example the total saving after two years with a smaller deposit comes to £3,600.

Top Five 95% Mortgages (two-year fixed rate deal)

AVERAGE TOTAL COST PER YEAR AT 95%: £12,659.

Example is based on a two-year fixed rate mortgage loan of £142,500 over 25 years. All products with early repayment charges (ERC) which extend beyond the fixed period are specifically excluded. Property value £150,000. Legal fees and stamp duty are excluded.

Top Five 96% Mortgages (two-year fixed rate deal)

AVERAGE TOTAL COST PER YEAR AT 96%: £12,456.

Example is based on a two-year fixed rate mortgage loan of £144,000 over 25 years. All products with early repayment charges (ERC) which extend beyond the fixed period are specifically excluded. Property value £150,000. Legal fees and stamp duty are excluded.

And the savings could be even greater if you want to make the most of the 96% mortgage option. By choosing a flexible mortgage which enables you to make overpayments you could put the extra £1,500 that you haven't used for your deposit to good use. Overpaying will enable you to reduce your overall outstanding loan after it has been arranged, cannily side-stepping the HLC. All of the mortgages shown will allow you to do that.

In this way, it's possible to put down a smaller deposit and still pay less. This goes against the grain as intuitively it makes sense to pay the largest deposit you can manage. But remember, it's crucial to look at mortgage deals in their entirety taking into account all the costs that apply. Don't be seduced by the better headline interest rates on mortgages which require a larger deposit, as they're clearly not always the best deal.

More: How I Picked My Mortgage | First Time Buyers Need Help! | Have a look at The Motley Fool Mortgage Service to help you compare the market.