Ultra-low deposit mortgages are becoming increasingly available to first-time buyers, but experts warn there are risks involved with taking them.
There were more than 500 mortgage deals on the market at the start of the month for those with just a 5 per cent deposit, according to financial analytics firm Moneyfacts.
Brokerage Mojo Mortgages also suggests 12.4 per cent of its first-time buyer customers are now taking mortgages with deposits of 5 per cent or less, compared to 7.7 per cent in 2024.
But are the mortgages actually a good option for first-time buyers? The i Paper takes a look.
They allow you to buy with smaller savings
The obvious upside of a 5 per cent deposit mortgage is that they allow you to buy a home having saved less cash upfront.
If you want to buy a £200,000 property, with a 5 per cent deposit, you only need £10,000 in savings to get a mortgage on it.
If a 10 per cent deposit was needed, you would have to save double – £20,000.
“For some it gives them the opportunity to get on to the housing ladder more quickly,” explains Elliott Culley of Switch Mortgage Finance.
Rates are far higher for 5% deposit mortgages
Mortgages offered to customers with 5 per cent deposits are on the whole more expensive than deals that need bigger deposits.
This, combined with the fact you will be borrowing more money, mean your monthly repayments will also be higher.
The lowest 5 per cent deposit mortgage rate available across the whole of the UK is 4.54 per cent, from West Brom Building Society
With a 10 per cent deposit, customers can get a 4.13 per cent deal from HSBC.
If you’re buying a £200,000 property, then with a 5 per cent deposit you’ll be borrowing £190,000 and paying £1,061 per month on a 25-year term.
With a 10 per cent deposit you’ll be borrowing less – £180,000 – and at a lower rate. On that HSBC deal you would pay £963 per month, £1,200 cheaper over a year than if you took the 5 per cent deposit deal.
What are the best 5% deposit mortgage rates?
There’s a risk of ending up in negative equity
Taking a 5 per cent deposit mortgage also increases the chance you end up in negative equity.
This happens when the amount you owe on the mortgage is higher than the current market value of the property.
It can mean selling the home is more challenging, as you must pay the lender the difference between the sale price and the outstanding loan.
It’s most typical when prices fall, but for those with big deposits, it’s less likely as more dramatic price drops are needed for them to be affected.
For those with small deposits, it’s more of a risk.
Culley explained: “The risk of negative equity can never be fully discounted regardless of your equity in the property, but the risk is certainly mitigated depending on the region of the UK you live in.
“London and the South are more likely to be affected with house prices decreasing whereas the North of England is performing more strongly,”
Who they can work for – and what to do if you get one
Some may consider that getting a 5 per cent deposit mortgage is their best way to buy a home quickly, and is better than the alternatives, such as renting.
Experts say they may be best for those with consistent incomings, who have struggled to build savings.
“In terms of the typical borrower, 5 per cent deposit mortgages tend to suit those with secure, stable incomes and strong affordability who have simply struggled to build a larger deposit while renting.
“They are less suited to anyone already stretched month to month or reliant on variable income to make the numbers work,” said Nick Mendes.
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Mendes added that once you get one, you should try and overpay if possible, if your mortgage allows it.
“If affordability allows, modest regular overpayments can make a real difference in the first few years by reducing the capital balance and improving the loan-to-value ahead of the next remortgage.”
Improving the loan-to-value means you will probably get a cheaper rate once your deal expires and you need to get another fixed rate.
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