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Low-deposit mortgage deals vanishing – what it means for first-time buyers

Low-deposit mortgage deals vanishing – what it means for first-time buyers

Mortgage deals for first-time buyers with a low deposit have been disappearing from the market since the coronavirus pandemic took hold in the UK, new data shows.

Analysis using our Mortgage Best Buys tool found that there aren't any standard mortgage deals available to first-time buyers with a 5% deposit at the moment.

It also showed that there are just 20 standard deals available for those with a 10% deposit – with several of these being long-term fixed deals where you'd be locked in for up to 11 years.

This is a fraction of the number of low-deposit first-time buyer deals that were available at the start of 2020 when, according to data from financial information company Moneyfacts, there were 751 deals available for those with a 10% deposit and 386 available at 5% (though this will include all types of deals, not just standard ones).

The size of a deposit is essentially the amount of the cost of the property a borrower has to pay upfront. They can borrow the rest of the money from the mortgage lender.

Sometimes mortgage brokers and lenders express this as loan-to-value (LTV), with an LTV of 90% meaning you'll have to put down a 10% deposit for the property, and 85% LTV meaning you'll put down a 15% deposit and so on.

See MSE Kit and MSE Katie's blog – 10 things we learned about buying our first homes during the coronavirus pandemic – for more help. Use our Mortgage Best Buys tool to find the right deal for you.

As a first-time buyer, how much deposit do I need?

This is all about loan-to-value – the lower LTV, meaning the bigger the deposit, the better rate you'll get. While there are some (but not many) standard deals available at 10%, they're likely to be expensive. To have a decent choice of deals with competitive rates, you'll typically have to cough up a deposit of at least 15% (meaning an LTV of 85%). We spoke to 10 of the biggest mortgage lenders, and seven of them wouldn't accept a deposit of less than 15%.

Here's the lowest deposit you can put down to get a mortgage with each of the biggest mortgage lenders at the moment:

Highest LTV offered by major mortgage lenders to first-time buyers

Lender Lowest deposit available
Barclays 15%
Clydesdale Bank 15%
Coventry Building Society 15%
HSBC 15%
Lloyds 15%
Nationwide 10%, but it's at an expensive rate (see below)
RBS 15%
Santander 15%
Virgin Money 10%, but only on really long fixes (see below)
Yorkshire Building Society 15%

It's also worth being aware that even when a lender does offer a 10% deposit deal, it may be a long fix, or not a particularly cheap deal.

For example, Virgin's only offering longer fixes (8 or 11 years – two of each) for its 10% deals.

It's also worth noting that, in general, mortgage-lending criteria has tightened over recent months. If you've only got a small deposit, you might find you need to produce even more proof of your income.

First-time buyer with only a small deposit? Here's what some mortgage brokers suggest

We've spoken to three mortgage brokers – Trinity Financial product and communications director Aaron Strutt, L&C Mortgages associate director of communications David Hollingworth, and John Charcol senior technical manager Ray Boulger – about what you should do if you're a first-time buyer with a small deposit, and they echoed our tried-and-tested tips:

  • If you can stretch to a 15% deposit (even if it means relying on help), it may be worth doing so. If you want to increase the number of mortgage deals available to you and get a cheaper rate, it's worth trying to stretch to a 15% deposit if possible. This is because many lenders are still offering deals at 85% LTV, as shown in the table above, meaning rates will be more competitive. Here's an example of how scraping together a bit more can make a big difference:

    Imagine you've a £35,000 deposit for a £250,000 home – that's a 14% deposit, and the top two-year fix is 3.24%. Yet if you could find an extra £2,500 to get to 15%, the top two-year fix is 2.1%, saving £1,396/year.

  • If you can only afford a small deposit, have a look at specialist mortgages that can offer alternative options. If there's no way you can get up to 15%, there are still some alternative options available, including: 

    - Guarantor mortgages. A number of deals will take parental income (or another relative) into account as well as the child's income, as long as the parents can still cover their own mortgage – this can help you get a bigger mortgage as it's worked out on a higher income. These deals are few and far between, so it's best to speak to a broker to see if any of them are available to you. Read our guarantor mortgage lowdown for more info.

    - Help to Buy equity loans. These are an increasingly popular means of getting on to the housing ladder, but are only for new builds that are £400,000 or under in value (£600,000 in London). Here, the Government will lend you up to 20% (40% in London) interest-free for five years. For more, see our Help to Buy Equity Loans guide.

    - Shared ownership. This lets first-time buyers buy a share in the property, and rent the rest. Read page nine of our First-Time Buyer's Guide for how to apply and how it works.
  • If you don't absolutely have to buy now, consider waiting. Don't stretch yourself to the limit just to get a mortgage – the overall state of your finances is more important. Remember that renting isn't a dirty word. While you might be able to get a lower deposit deal now, you may end up paying for the privilege as it's likely to be expensive.

    Another reason for waiting is that lower deposit mortgages may make a return. Ray Boulger predicts that 5% deposit mortgages could come back next year. He said: "Despite lenders' current risk aversion, I expect at least one major lender to return fully to the 95% LTV market by early next year and others to follow within a few months."

  • Lastly, you shouldn't assume you have to pay the asking price for a property – always see if you can haggle. Before you even apply for a mortgage, see if you can drive down the price of the property you wish to buy. The less you pay, the more the sum you set aside for your deposit will be worth.

    For example, if you have a deposit of £20,000 and pay the asking price of £143,000, that would equal a 14% deposit. Yet if you put in an offer (that gets accepted) of £133,000, your deposit would equal 15%.