Getting a mortgage with a small deposit is now more affordable than ever, despite two base rate rises in the past 12 months, Moneyfacts has revealed.
This month, the average interest rates for both two-year and five-year deals at a 95% loan-to-value ratio reached their lowest level since Moneyfacts’ records began in 2007. This means buyers with a 5% deposit are paying less interest on their home loans than ever before.
Which? explains the trends and what they mean for first-time buyers.
95% mortgage rates hit new low
The average rates for two-year and five-year deals at 95% LTV has been decreasing over the past year, and in September hit the lowest levels on record, Moneyfacts reports.
This comes despite the fact that the Bank of England has increased the base rate twice over the past year, in November 2017 and then August 2018.
As a general rule, an increase to the base rate pushes up mortgage rates – and this has been evident in lenders’ standard variable rates – but small-deposit mortgages seem to be bucking the trend.
The average rate for two-year 95% mortgages hit a low of 3.73% in September 2018 – almost two percentage points lower than five years ago.
Five-year fixed-rate deals are also cheaper, with the average for 95% LTVs hitting 4.08%, well below the 5.83% recorded five years ago.
You can see the movement of fixed-rate deals over recent years in the chart below.
Best 95% mortgage deals
If you’re considering buying a home with a 5% deposit, it’s worth shopping around to find the right deal for your circumstances.
The lowest-rate two-year deal currently available at this LTV is from Marsden Building Society, which is offering a 2.79% initial rate. But you’ll need to pay fees amounting to 0.5% of the loan you take out. This deal has a comparably high APRC of 5.5% over the course of a 25-year term – possibly due to the high fees – though keep in mind that you may be able to remortgage after the initial two-year period expires.
Two-year fixed-rate mortgages at 95% LTV
|Marsden BS||2.79%||5.5%||0.5% of advance|
|Hinckley & Rugby BS||3.09%||5.3%||£199|
For five-year deals, the lowest rate currently available at a 95% LTV is from Skipton Building Society, with an initial rate of 3.45% and an APRC of 4.6%. You’ll also pay fees of £495.
A five-year fixed-term can offer long-term stability, particularly at a time when the base rate is predicted to change. But you may face steep early repayment charges if you decide to sell your home during the period. And, as recent trends have shown, fixed-rate deals don’t necessarily fluctuate in line with base rate changes, so you may miss out if rates continue to get cheaper.
Five-year fixed-rate mortgages at 95% LTV
|Skipton BS||3.45%||4.6%||£495 completion fee|
|Hinckley & Rugby BS||3.49%||5.1%||£0|
- Find out more: best and worst mortgage lenders
Should I get a 95% mortgage?
Buying with a 5% deposit can seem like an appealing option for first-time buyers struggling to save a large enough pot, especially in expensive housing markets like London.
You may be able to buy more quickly by cutting the size of your deposit, which can be important when prices are growing fast.
But keep in mind that you’ll owe a large mortgage comparative to the equity you hold. If house prices ease off in the initial years you own the property, you may be at risk of falling into negative equity, meaning you’d struggle to remortgage or sell your home.
And even with today’s record low interest rates, deals with high LTVs tend to be more expensive than those requiring larger deposits. Putting down more money upfront could save you thousands over the life of a mortgage, though you may need to spend longer saving up.
- Find out more: our guide to 95% mortgages
Alternatives to 95% mortgages
If you only have a limited deposit, there are some other options available to you.
Help to Buy equity loan
Those with a 5% deposit buying a new-build home may qualify for a 20% government equity loan (or 40% in London). This allows you to take out a smaller mortgage, hopefully at a better interest rate.
After five years, you’ll need to start paying interest on the equity loan, and you may need to repay the full government share when you remortgage or sell.
- Find out more: Help to Buy equity loans
Family or guarantor mortgage
If you have family who are able to help you out, you may be able to borrow with a 5% deposit for a much better interest rate – or with no deposit at all.
Guarantor mortgages require your family member to agree to meet your loan requirements if you can’t, and they may have to offer their own home as security.
Alternatively, you may be able to use a family deposit or offset mortgage, where a family member deposits the equivalent of a 10% or 20% deposit into a special account, which is then held as security against the loan.
- Find out more: how parents can help first-time buyers