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First time buyers: Small deposits are back

Row of houses with mortgage sign Mortgage finance is starting to improve for first time buyers with lenders offering small deposit mortgages and better mortgage rates.

First time buyers who have found themselves locked out of the property market by tough lending criteria and hefty deposits have been starting to give up hope of ever becoming homeowners.

In fact, recent findings from the Halifax show that nearly half of us believe that Britain will become a “nation of renters” within the next generation.

However, there are now signs that lenders are trying to tempt first time-buyers back into the market with higher loan-to-value (LTV) deals – which means smaller deposits – as well as lower mortgage rates.


Lenders loosening their criteria

Last week, Aldermore Bank unveiled a 100 per cent mortgage aimed at first time buyers and moves aged over 25.

The Family Guarantee Mortgage allows buyers without a deposit to purchase a house - as long as a relative guarantees any borrowing above 75 per cent of the property’s value with a charge on their own home.

The mortgage has a three-year fixed rate of 6.48 per cent and the maximum loan is £250,000. There is a completion fee of £999 and a non-refundable booking fee of £299.

The number of products available at 90 per cent LTV – which means you only need a 10 per cent deposit – has risen to the highest level for almost three years.

Plus, as more and more lenders move to offer deals that require smaller deposits, mortgage rates will be driven down further.

“There are more products available at higher LTVs than at any time since the credit crunch,” says Melanie Bien from broker Private Finance. “This means more choice and lower rates for borrowers, which is great news for those who have scraped together a modest deposit.”


Best buy deals with a 10 per cent deposit

For those who have been able to amass a 10 per cent deposit, Chelsea building society has a two-year fix at 4.39 per cent with a £195 fee, and Yorkshire building society has a three-year fix at 4.99 per cent with a £495 fee.

For those looking to fix for a little longer, Chelsea has a five-year fix at 5.39 per cent with a £195 fee.

Those who want a tracker could opt for HSBC’s deal pegged at 4.59 per cent over base (giving a rate of 5.09 per cent for the term); this comes with no fee or early repayment charges, which means borrowers could move to a fix when interest rates rise


What about those with a 5 per cent deposit?

In recent months, some lenders have even returned to the 95 per cent LTV range which means you only need a deposit of 5 per cent.

That said, you need to be aware that these products are still in relatively limited supply.

At present, “best buy” deals include a two-year fix from Skipton building society at 5.99 per cent with a £195 fee and a “stepped fixed” deal from the Cambridge building society at 5.29 per cent in the first year, rising to 6.49 per cent for the remaining four years; this comes with a £599 fee.

Further, we are now even seeing a return to deals at 100 per cent LTV – which means no deposit is required.

“Northern Bank, based in Northern Ireland, is offering a deal at 100 per cent LTV to account holders,” says Bien.

“This means those without parental assistance or savings may now be able to buy their first home.”


Clean credit record is crucial

While all of this is positive for first time buyers, remember that your credit history still has a big part to play.

“Credit scoring is still tougher for those with small deposits than it is for those with, say, a 25 per cent down-payment,” says Bien. “This is because these borrowers are regarded as being higher risk.”

This is a view shared by Nick Leeming from property website,

“Qualifying criteria on higher LTV products borders on the draconian, and aren’t appropriate to the financial hardships afflicting first time buyers,” he adds.

Richard Sexton from chartered surveyors, also points out that deals which require a smaller deposit can be more expensive than those which require a bigger deposit.

“There is a discernible gulf between interest rates on low LTV deals, which are tantalisingly cheap, and the more restrictive rates on deals at 90 per cent LTV and above,” he says.


Outlook is brighter

Nonetheless, there are signs that the frozen mortgage market is beginning to thaw, with encouraging figures from the Council of Mortgage Lenders (CML) showing that June saw the highest number of mortgages taken up by first-time buyers in 10 months.

According to its figures, the average deposit paid by a first time buyer stood at 20 per cent – higher than the historic norm of 10 per cent, but lower than the 25 per cent seen throughout 2009.

This suggests that things are slowly starting to move in the right direction – although if you’re serious about taking the first step, the key right now is to carry on saving hard to scrape together the biggest deposit you possibly can.

All deals quoted correct at time of publication

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Esther Shaw

Esther Shaw

Esther Shaw is a regular contributor to and is the former deputy money editor at The Independent and Independent on Sunday. Before that, she worked as a money and City reporter on The Daily Express and Sunday Express.
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