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5% Deposit Mortgages Reach 17-Year High, Offering Hope to First-Time Homebuyers
Prospective homebuyers with limited savings are seeing a surge in mortgage options, as the availability of 5% deposit mortgages has climbed to its highest point since the financial crisis. This positive development for first-time buyers and others with smaller deposits signals increased accessibility in the property market. Data from financial analysis firm Moneyfacts reveals that mortgage products requiring only a 5% deposit, representing 95% of a property’s value, have increased to 442 this month. This figure represents the largest volume observed since March 2008, achieving a 17-year peak. These low-deposit mortgages, particularly attractive to first-time buyers, now constitute 6% of all mortgage offerings currently available. The variety of 10% deposit mortgages has also reached a 17-year record, with 845 options presently available.
Current Interest Rates for 5% Deposit Mortgages
Borrowers opting for a 5% deposit mortgage typically face elevated monthly interest payments compared to individuals with larger deposits or more equity. Currently, the average interest rate for a 5% deposit deal stands at 5.62% for a five-year fixed term and 5.81% for a two-year fixed term.
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However, borrowers with strong credit scores who actively compare offers may secure more competitive rates. For instance, Barclays recently reduced its mortgage rates and is now offering a 4.84% five-year fixed rate for those purchasing property with a 5% deposit.
This specific deal, which includes no additional fees, would result in monthly payments of £1,151 for a £200,000 mortgage, based on a 25-year repayment period. Buyers can also access a 4.9% two-year fixed rate with Barclays, while Coventry Building Society provides a 5.01% fixed rate for a three-year term.
Factors Driving the Rise in 5% Deposit Mortgages
Rachel Springall, a finance expert at Moneyfacts, commented on the trend: ‘The expanding selection of low-deposit mortgages will undoubtedly be welcomed by individuals seeking to remortgage or first-time buyers.
‘The Government has expressed its desire for lenders to enhance UK economic growth, and the increased availability of products for aspiring homeowners represents a positive stride in this direction.’
She further suggested that banks might be aiming to attract new clientele, possibly due to concerns that the recent adjustments to stamp duty could moderate activity in the housing market.
Chris Sykes, technical director at broker Private Finance, added: ‘5% deposit mortgages are crucial for maintaining the dynamism of the property market and enabling primarily first-time buyers to enter homeownership.’
Sykes further noted that small deposit mortgages are now more feasible for purchasers, whereas higher interest rates previously made monthly repayments prohibitively expensive with smaller deposits.
‘Interest rates have now stabilized to a point where a 95% mortgage is once again a viable option. At certain junctures in recent years, they were prohibitively costly, suggesting that first-time buyers might have been better off postponing purchase and continuing to rent,’ he elaborated.
Considerations for Buyers Using a 5% Deposit
While interest rates on 5% deposit mortgages are comparatively higher, many first-time buyers may deem it a worthwhile trade-off to overcome renting and gain access to the housing market.
Average asking rents have surged by 40% over the past five years, from £1,087 to £1,526 per month, according to Rightmove data.
However, a potential concern is the risk of declining house prices, which could lead to negative equity, making it difficult to remortgage or move.
Negative equity arises when a property’s value falls below the outstanding mortgage balance, a greater risk when a smaller deposit is made.
Sykes advised: ‘The primary consideration is the potential for negative equity. Therefore, longer-term fixed-rate mortgages, such as a five-year fix, should be considered to protect buyers from property price volatility.’
‘Over five years, substantial equity can be accumulated through monthly payments, whereas a two-year term might not achieve the same progress.’
‘Assess how close you are to reaching a 10% deposit. If it requires only a few additional months of saving, opting for a 10% deposit can often unlock lower interest rates, yielding significant savings in the long run.’