These days the bigger the deposit for your new home the better. But will buyers with just 10% be left out in the cold?
The credit crunch has unleashed some really nasty demons into the personal finance world over the last year. Not least the tightening up of lending criteria for mortgage borrowers.
The credit crunch has forced mortgage lenders to demand huge deposits from beleaguered borrowers. It's now not uncommon for the best buy loans to be reserved for those lucky enough to have a 25% deposit. Worse still, some lenders will only offer the best rates to borrowers who can put down a whopping 40% upfront!
But it isn't all doom and gloom for those of us who are ready to step onto the first rung of the property ladder. In the last few weeks we have seen the first tentative signs of recovery in the mortgage market. Indeed a round of mortgage interest rate cuts has already taken place. This follows a drop in the cost of interest rate swaps which are used by lenders to price fixed-rate mortgage deals.
That's great news for anyone who needs a mortgage now!
10% deposit
But if you've only managed to build up a 10% deposit for your new home, are you destined to pay over the odds? And are there any lenders still willing to take you on?
Yes! Nine of the ten largest UK mortgage lenders will accept first-timers with smaller deposits. Bucking the trend is Alliance & Leicester, which has recently cut its maximum loan from 90% of the property value to just 85%. This means anyone planning to approach A&L for a home loan will need a 15% deposit or more.
Thankfully, the other nine big lenders are prepared to be a little more generous. While that sounds pretty encouraging, it's normally true the more you can put down as a deposit the better. So how much extra will you have to pay if you need a 90% mortgage?
The table below compares 75% mortgages and 90% mortgages offered by the ten largest lenders. Together these lenders comprise over 77% of the mortgage market, so this should give us a pretty good idea overall.
I've looked at fixed-rate mortgage deals over various terms. For each lender I've selected the lowest rate deal at 90% and then compared it with the corresponding 75% loan. Here are the results:
Top ten lenders: 75% mortgages versus 90% mortgages
Lender | 75% LTV mortgages | 90% LTV mortgages | ||||
|---|---|---|---|---|---|---|
| Rate | Fee | Fixed rate period to... | Rate | Fee | Fixed rate period to... |
Abbey | 5.89% | £1,499 | 02.12.13 | 7.09% | £2,499 | 02.12.13 |
Alliance & Leicester | 5.99% | £1,125 | 31.10.10 | Not available | Not available | Not available |
Bradford & Bingley | 6.49% | £999 | 31.10.11* | 7.09% | £999 | 31.10.11 |
Cheltenham & Gloucester | 5.79% | £995 | 31.12.13 | 6.25%*** | £895 | 30.11.13 |
Halifax | 5.79% | £995 | 30.11.13 | 6.19% | £995 | 30.11.13 |
HSBC | 6.43% | £599 | 31.10.10 | 6.43% | £599 | 31.10.10 |
Nationwide BS | 5.98% | £1,499 | 5 years | 6.43% | £1,499 | 5 years |
Northern Rock | 5.89% | £1,495 | 01.10.10 | 7.19% | £1,495 | 01.10.10 |
Royal Bank of Scotland | 5.89% | £999 | 31.10.13 | 6.19% | £799 | 31.10.13 |
Woolwich (Barclays) | 6.19% | £995 | 31.10.18 | 6.49% | £995 | 31.10.18 |
Data from Fool partner, Moneyfacts as at 4 September 2008. *2 year fixed rate deals also available. **3, 5 and 10 year fixed rates also available. ***Online deal only.
Where the mortgage loan represents a high proportion of the property value (what's known as a high loan-to-value, LTV), we would normally expect the rates and/or the fees to be greater to compensate for the extra risk the lender is taking on.
So it's a welcome surprise to see HSBC treats all borrowers in exactly the same way. In this example, a two year fixed-rate loan is available at a rate of 6.43% with a relatively low fee of £599. And this is available to borrowers with a 10% deposit and a 25% deposit alike.
But it's different story from Abbey where borrowers with a 10% deposit are much worse off. Not only will you have to pay a huge product fee of £2,499 -- which is an extra £1,000 -- but the rate for a five-year fix is a whopping 1.2% higher at 7.09%. If you were borrowing £150,000 over 25 years, this would bump up your monthly repayments by £113.70, compared with a 75% LTV borrower.
Other lenders don't penalise higher LTV borrowers quite so much. The difference in rates for deals from RBS and Woolwich is just 0.30%.
With HSBC and Abbey at opposite ends of the spectrum, you can easily see how it pays to shop to around before diving in. Some lenders are more inclined to tackle the 90% LTV market than others. That's why it makes sense to speak to an independent mortgage broker who can help you choose an appropriate deal. You could try The Motley Fool Mortgage Service as your first port of call.
The best buy fixes at 90% LTV
Today, the best buy 90% mortgage isn't found at any of the top ten lenders. For this we need to look further afield to Yorkshire Building Society which is one of a handful of lenders who are offer top fixed rates of less than 6% (5.99% fixed for ten years, £995 fee).
Alternatively, if you want to fix your rate for a shorter period, Britannia Building Society is offering a decent two-year deal (6.19%, fee £999).
And to be fair to the large lenders, Halifax and RBS aren't far off the top spot either with their five-year fixed rate loans (details shown in the table above).
So there's no need to panic if you only have a 10% deposit. But I warn you to act quickly if you see a deal you like because, these days, they don't tend to hang around for long.
Editor's note: Also take a look at Market Harborough Building Society's new 2-year fixed-rate mortgage. It's a 5.75% deal with an attractively low £595 arrangement fee for borrowers with a 25% deposit.
Most mortgage brokers can't offer you this deal but we have an exclusive Fool hotline for this mortgage. Call 0800 953 0609 and a broker can help you decide whether this is the right deal for you.
More: A Dangerous Way To Buy Your First Home | The Motley Fool Mortgage Service