There are now more 95% mortgages on the market than at any point in the past two years, handing a boost to first-time buyers with small deposits.
The return of low-deposit deals is a sign of confidence returning to the mortgage market after the recent period of high inflation – but mortgage rates still remain high.
Read on to find out about what’s happening to mortgage rates for first-time buyers, and for advice on how much you could cut your repayments if you can save a slightly bigger deposit.
More choice for first-time buyers with small deposits
To buy a home, you’ll usually need to put down a deposit of at least 5% of the property’s price. This means you’d take out a mortgage for the remaining 95%.
Mortgages are expensive at the moment, and 95% deals tend to come with the highest rates.
The good news for first-time buyers is that the market appears to be freeing up. Moneyfacts says there are currently 361 mortgages on the market at 95% loan-to-value (LTV), the highest number recorded since May 2022.
Deals are also sticking around for longer. The average shelf life of a mortgage deal is now 30 days, compared to just 15 days at the start of June.
Lenders having the confidence to launch and keep deals on the market for longer is a sign that greater stability may be returning.
- Find out more: how to buy a house
What’s happening to mortgage rates?
Mortgage rates have been high for some time, though there are hopes that they could fall in the remainder of 2024.
Moneyfacts says the average two-year fixed-rate deal at 95% LTV is currently priced at 6.26%, and the average five-year deal is at 5.78%.
Cheaper rates are available. This week’s chart-topping 95% mortgages are priced at 5.79% and 5.21% respectively.
With inflation now at the Bank of England’s target of 2%, it could choose to lower its base rate when it next meets at the start of August.
A cut to the base rate would almost certainly result in mortgage lenders cutting their prices. However, it’s highly unlikely that rates will tumble quickly; the decline is expected to be gradual.
- Find out more: best mortgage rates for July 2024
How much cheaper is a 90% mortgage?
A 5% deposit is the minimum you’ll need to buy a home, but if you can stretch to 10% you could make significant savings on your monthly repayments.
The gap between the cheapest 90% and 95% mortgage deals is currently around 0.5-0.6 of a percentage point.
The combination of borrowing less money (due to putting down a bigger deposit) and getting a lower mortgage rate can have a big effect on how much you’ll pay each month.
The example below shows the difference in repayments between taking out the cheapest two-year fix at 90% (5.19%) and 95% (5.79%). This is based on buying a house for £250,000 with a 30-year mortgage term.
As you can see, the 90% mortgage is around £150 a month cheaper than the 95% deal.
- Find out more: 95% mortgage calculator
How much do I need for a 5% deposit?
Saving a big enough deposit has long been a significant obstacle to buying your first home.
How much you’ll need for a 5% deposit varies dramatically depending on where you’re buying.
When we recently crunched the numbers for all local authorities in Great Britain, we found that the amount needed for a 5% deposit ranged from as little as £5,000 (in Burnley, Lancashire) to more than £50,000 (in Kensington and Chelsea, London’s most expensive borough).
You can find out how much you’ll need to save in your area by using the interactive map in our story on deposits for first-time-buyers.
Things to consider before applying for a mortgage
If you’re thinking of applying for your first mortgage, you might find it helpful to get advice from a mortgage broker, who can find you a suitable deal and walk you through the application process.
Whether you choose to get help or go it alone, it’s worth thinking about the following things early on:
- Do I have enough saved? In addition to your deposit, you’ll need to factor in the other costs of moving, such as stamp duty (if you’re buying a property above the first-time-buyer price threshold), house surveys, legal costs and mortgage fees. See our guide on the cost of buying a house for estimates.
- How is my credit report looking? Before starting the mortgage application process, check your credit report to ensure everything is up to date and accurate. What might seem like minor errors, such as an old missed utility bill or not being on the electoral roll, can damage your mortgage chances.
- How long can I borrow for? Many first-time buyers choose to spread their loan over a longer period to improve their affordability. Theoretically, you can borrow for up to 40 years, but this will depend on your age and the lender. Borrowing for longer means you’ll pay more interest. See our story on ‘marathon’ mortgages for more information.
- How long should I fix for? Most commonly, people take out either a two-year or five-year fixed-rate mortgage. Five-year deals are currently cheaper due to the anticipation that mortgage rates will fall from their current levels. These deals give longer-term rate security, but less flexibility to switch. Find out more in our guide to choosing a mortgage term.
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