Lloyds Banking Group is launching a new mortgage aimed at helping first-time buyers get onto the property ladder with deposits as low as £5,000.
From Monday, first-time buyers applying through Lloyds, Halifax and Bank of Scotland will be able to access the deal on properties worth up to £300,000.
On a £300,000 property, £5,000 equates to a deposit of just 1.67 per cent, which is far lower than most mortgages require.
How does the mortgage work?
The mortgage comes on a five-year fixed rate of 5.89 per cent. There’s no fee for the product, but borrowing is capped at 4.5 times income.
It is not available for shared ownership purchases, new-build homes or buyers relying on gifted deposits.
If you were borrowing £300,000 getting a mortgage requiring a 5 per cent deposit, you would need to put £15,000 up front, and if the mortgage required a 10 per cent deposit, you’d need to double this – £30,000.
How good is the rate compared to others?
The product enters a growing market of low-deposit mortgages, although borrowers able to save larger deposits will still typically access cheaper rates.
On a £300,000 purchase using the new deal, a buyer putting down a £5,000 deposit would need to borrow £295,000 at 5.89 per cent. Assuming a typical 25-year repayment term, that would mean monthly repayments of roughly £1,881 a month.
If you were getting a mortgage with a 10 per cent deposit, the best five-year rate on the market, from Virgin Money, is 4.84 per cent.
Borrowing the same amount on this rate would cost just £1,697 per month, but of course you’d have to have saved a bigger deposit.
Amanda Bryden, head of Halifax Intermediaries and Scottish Widows Bank, said: “We regularly get feedback from brokers that first-time buyers find getting a deposit together one of the main barriers to them buying a home and today we are taking another step to help them get past that.”
Andrew Montlake, a mortgage broker at Coreco, said: “This will not be right for everyone, and proper professional advice is essential, but for the right borrower it could be the key that finally unlocks the front door.”
What are the risks?
While lower deposit mortgages can help buyers purchase sooner, they also leave borrowers more exposed if house prices fall.
With only a small amount of equity in the property, buyers could face negative equity if the value of their home drops below the size of their mortgage.
If you bought a flat for £300,000 with a £280,000 mortgage, then the value of the home dropped to £290,000, you could be in negative equity, which makes it hard for you to sell your home or remortgage.
David Hollingworth, associate director at L&C Mortgages, explained: “A smaller deposit does mean a higher chance of negative equity if property prices fall. That only becomes a problem where the property needs to be sold, which would crystallise a loss.”
But he added that the five-year fixed rate structure could provide stability for borrowers during the early years of ownership.
He said: “There’s a big focus on affordability and the mortgage is a five-year fixed rate, so monthly payments won’t be affected by changes to interest rates.
“That should help ensure that payments are manageable and by the end of the five years borrowers will have eaten into their mortgage balance, hopefully riding out any dip in house prices in the meantime.”
Are there other products that do similar on the market and how do they compare?
A growing number of lenders have introduced low-deposit or no-deposit mortgages in recent years as affordability pressures have intensified.
Some products allow borrowers to take out mortgages above 95 per cent loan-to-value, while a small number of lenders have introduced 100 per cent mortgages backed by rental payment histories or family guarantees.
An example is Skipton Building Society’s track record mortgage. This is for people who haven’t owned a property in the last three years, and requires no deposit, with Skipton looking at your track record of paying rent.
Santander also offers a product known as My First Mortgage, which allows you to buy a home with a deposit as small as 2 per cent.
Hollingworth said: “This new launch is significant as it marks another major high-street lender developing solutions for those with a small deposit.
“We’ve seen a growing range of lenders in this space, designing products that could significantly speed up the journey to home ownership.”
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