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First-time buyers set to gain from cheaper loans

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Home buyers with small deposits are seeing the cost of mortgages falling thanks to increased competition among lenders. We explain how to get the right deal.

Couple with house keys

Prospects are looking better for would-be first-time buyers, with a number of lenders introducing cheaper loans for borrowers with small deposits.

Nationwide has become the latest company to offer improved terms to new borrowers.

New lower rate

The building society has just announced a cut in the interest rate on its two-year fixed-rate loan for buyers with deposits of 5%.

This mortgage is now priced at 3.89% a year: it comes with a £999 fee, but valuation is free and there is a £500 cash rebate available.

Charlotte Nelson at analyst Moneyfacts.co.uk said: “With a fantastic incentive package, this deal is likely to be a cost-effective choice for many borrowers looking to get onto the first rung of the housing ladder.”

David Hollingworth at mortgage broker London & Country said that high levels of competition between lenders were driving rates down.

Benefits of competition

“The market is extremely competitive, which is great news for borrowers as it means lenders are pricing sharply in order to attract business,” he explained.

“As a result, first-time buyers will find that mortgage rates are more attractive than just a few years ago.

“That doesn't just apply to those with very large deposits and, as lenders have become increasingly competitive, so it has helped improve rates for those with smaller deposits as well.”

But Hollingworth added that, while more and more banks were willing to lend to those who could afford just a 5% deposit, rates were substantially better for buyers who could put down 10% or more.

Choosing the right loan

money bank

New borrowers will also have to decide whether or not to opt for a fixed-rate mortgage, where the interest rate is guaranteed to be at a certain level for at least the first few years of the loan’s term.

The alternative is a tracker or variable deal, which might start with a lower rate but which could become more expensive as soon as the Bank of England starts to raise interest rates.

“Most borrowers have been electing to fix their mortgage rate and fixed rates have tended to be a favourite with first-time buyers, who like to know where they stand month to month,” Hollingworth said.

“The base rate has been at a record low of 0.5% for almost seven years and the debate continues as to when it may start to rise, fuelled by the recent decision to hike interest rates in the US.

When will rates rise?

“Fixed rates are extremely low at the moment but will start to rise if the market expects that a base rate rise is drawing close.

“In the meantime, borrowers can lock into a competitive rate and give themselves certainty of payment and protect against any potential rate rises if and when they come.”

Would-be buyers should do all they can to ensure their loan applications are accepted, Hollingworth said.

“In order to improve the chances of a successful mortgage application it makes sense to do your homework,” he explained.

First-timers returning to market

“If you have any concern about credit blips, it's easy to get hold of your credit file – and make sure that you are on the electoral roll. This is a simple thing that can impact on credit scoring.”

Meanwhile, new figures published by Halifax showed that the number of first-time buyers taking out mortgages in 2015 was 310,000, a 60% rise on 2011.

Craig McKinlay, mortgages director at Halifax, said: "For the second year in succession, the number of buyers getting on the first rung of the housing ladder has reached 310,000."

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