Accord becomes the first lender to bring back standard 5% deposit mortgages for first-time buyers
Accord Mortgages will become the first lender to bring back standard 5% deposit mortgages after the majority of lenders pulled out of the low deposit market a year ago due to fears the coronavirus crisis would have a negative impact on borrowers' ability to afford loans.
Accord, which is an arm of the Yorkshire Building Society, will launch the loans to first-time buyers from tomorrow. Here's how the new mortgage works:
- It has a five-year fixed rate of 3.99% and comes with a £995 fee and free standard valuation.
- At least one applicant must be a first-time buyer.
- You'll be able to borrow a maximum of 4.49 times your income up to a maximum of £500,000.
- You'll only be able to get it via a mortgage broker for now.
The loan won't be launched under the government's mortgage guarantee scheme announced in the Budget earlier this month - although this doesn't impact borrowers anyway. As far as they're concerned, there's no difference between a 95% mortgage offered through the scheme and a 95% mortgage offered outside the scheme. However, Accord's launch is just the first of many 95% deals that will likely come when the Government's scheme launches in April.
See MoneySavingExpert.com's Kit and Katie's blog – 10 things we learned about buying our first homes during the coronavirus pandemic – for more help if you're thinking of buying for the first time. You can also use our Mortgage Best Buys tool to find the right deal for you.
How Accord's 5% deposit mortgage compares
Here are the pros of Accord's new 5% deposit mortgage:
- It's the first standard 5% deposit mortgage available to first-time buyers in nine months. Accord is the first lender to bring back standard 5% deposit mortgages to first-time buyers in at least nine months, according to comparison site Moneyfacts. It says five lenders already offer 5% deposit mortgages but these are specialist products that come with restrictions such as requiring a guarantor, only being available to those who live or work in certain areas of the country, or they're for joint-borrower-sole-proprietors (JBSP), which is where you take out the mortgage with someone else.
Here are the cons of Accord's new 5% deposit mortgage:
- You can't use the mortgage to buy a flat or new build home. Accord says this is a blanket ban on all types of flat.
- You can't 'port' the mortgage if you move home and early repayment fees of up to 5% apply. This means you're either locked into the mortgage in the home you're buying for the length of the five year fix, or you'll have to pay off your mortgage early, which costs between 1.5% and 5% of the outstanding mortgage depending on how long into the fixed deal you are at the time you make the repayment.
- The 3.99% rate is quite high, so you may be better off with a 10% deposit mortgage. It's difficult to compare Accord's mortgage given there are no directly comparable 5% deals available. But while the product fee is typical, Nick Morrey, product technical manager at broker John Charcoal points out that the 3.99% rate is fairly high. Market leading 90% mortgages for those with a 10% deposit are 0.7% cheaper, while the cheapest rate on a 90% mortgage is currently 2.99% for a two-year fix. See below for more.
First-time buyer with a small deposit? Here's what some mortgage brokers suggest
We spoke 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.
- If you can stretch to a 10% or 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 10% or 15% deposit if possible. This is because there will be more deals available and rates will be more competitive as mortgages typically become cheaper at 90%, 80%, 75% and 60% loan-to-value (LTV). You'll also find shorter fixes of two or three years available, which gives you more flexibility.
- 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 10% or 15%, there are still some alternative options available, including:
- Guarantor mortgages. A number of deals will take parental income (or another relative's income) 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. But the guarantor's savings or home is put on the line if the borrower falls behind on repayments. 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 only for first-time buyers purchasing new builds in England that are under a certain value, which varies depending on where in the country you're buying (eg, it's £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.
Secondly, brokers have told us they expect more 5% deposit products to come onto the market in the coming weeks - particularly with the Government's new scheme launching in April - and they could be cheaper than Accord. See our 5% deposit mortgages guide for more info.
- 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%.
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