What to do if you've got a small deposit

Jane Baker looks at the deals on offer to mortgage borrowers with small deposits.

The mortgage market has been full of doom and gloom lately, especially for first-time buyers. Sadly, if you've got a small deposit, very few lenders want to lend to you.

The table below shows some of the deals available to borrowers who only have a 10% equity stake:

10% deposit mortgage deals

Source: Mortgage Brain. Rates are based on a mortgage of £180,000 over 25 years and a property value of £200,000. +Not available via brokers

As you can see all these deals offer fixed rates. There are now no tracker mortgage deals available to first-time buyers with a 10% deposit or less. The rates on offer - of 5.50% to 7.49% - are very high too, given that the Bank of England base rate is at an all-time low of 1%.

So, there's no question, small deposits are a big problem for borrowers. But do things start to look any better if you can save up a 15% deposit? The table below shows the top seven 85% mortgages:

15% mortgage deals

Source: Mortgage Brain. Rates are based on a mortgage of £170,000 over 25 years and a property value of £200,000. * The Society only lends on properties in Northern Ireland.

If you manage to increase your deposit by 5% (£10,000 in this example), your payments fall by around £200 a month. Of course, this is partly because you have borrowed less money (£170,000 instead of £180,000), but it is also partly because the rates on offer have fallen by at least 1.25%.

Once again, there are no competitive tracker deals on offer. But borrowers in Northern Ireland can take advantage of a discounted variable deal from Progressive Building Society, with a market-leading rate of 4.25% and a relatively low fee of £599.

25% and 40% deposits

If you had enough savings for a 25% deposit on that £200,000 home, there are more than 20 mortgage deals available to you with rates under 4%.

So how much would you save by putting down such a large deposit? At a rate of say, 3.99%, your monthly repayments would be just £791 (based on a £150,000 home loan and a £200,000 property price). That's £327 a month less than the best deal available to borrowers at 90% loan-to-value (LTV).

Similarly, if you managed to build up a huge deposit of 40% (60% LTV), there are almost 70 products on offer. Again, at the same rate of 3.99%, your repayments would cost just £632 - that's £486 a month less than you'd pay with a 10% deposit, a saving of £5,232 a year.

So, as you can see, there's a big difference in rates available to borrowers with small and large deposits. Nowadays, lenders provide little incentive for borrowers with small deposits to take the plunge, while offering generous rates to cash-rich borrowers and existing homeowners with large equity stakes.

So, what should you do?

If you only have a 10% deposit, then - as long as you can afford one of the expensive deals above - there's nothing to stop you getting on the ladder. Just bear in mind that the longer you wait, and save up for that deposit, the less you'll pay in the long run. With house prices still falling, you've got nothing to lose by waiting, either.

But if you're really, really determined to buy now, my advice would be to factor in the extra costs of your mortgage when deciding what to offer on your new home. In other words, if you can negotiate a discount of £30,000 by buying now, then you could argue that's worth more than five years of extra payments on a 90% LTV deal (compared to a 60% LTV deal). Of course, you should also take into account the fact that the price of the property may fall further in the coming months, and factor in that reduction, too.

I would also recommend you overpay your mortgage as much as you possibly can. In this way, when you come to remortgage at the end of your current deal, the LTV may be low enough to secure you a more competitive rate next time round.

But don't forget, when house prices are falling, there's a greater risk of falling into negative equity, where you owe your lender more than your home is worth. In the current climate, this would make moving home or remortgaging impossible - leaving you stuck on your lender's standard variable rate (SVR) mortgage, with no option to switch to a cheaper deal. Of course, some - but by no means all - SVRs are reasonably cheap right now, but there's no guarantee they will stay that way.

So, it's very important you consider all the possible ramifications of buying a home now. You might decide it's far safer to hold off for a time. Not only will this will give you an opportunity to save more towards your deposit and hopefully, get a shot at a more competitively priced deal - but you may find the property you want to purchase has become a fair bit cheaper too.

Whichever road you take, I wish you the best of luck!

If you need help with your mortgage, speak to an expert at lovemoney.com.

More: A place for 100% mortgages? | Is it time to go for a fixed rate?.