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4 Sep 2020

New 90% mortgage deal offers hope to first-time buyers - but there's a catch

Virgin launches seven-year deal, but watch out for the early repayment charges
row of houses

Low-deposit mortgages are disappearing by the day, but a new deal from Virgin Money could offer a solution to some first-time buyers.

Virgin's new 90% mortgage requires borrowers to lock in their rate for seven years, rather than the two or five years usually favoured by homebuyers.

Here, we assess whether this longer-term fix makes sense for first-time buyers looking to get on to the property ladder.

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What's happened to low-deposit mortgages?

First-time buyers have seen their mortgage options dry up since the COVID-19 outbreak began.

Data from Moneyfacts shows that there are just 46 fixed-rate mortgages available for buyers with a 10% deposit, compared with 446 at the start of March.

For those with a 5% deposit, the number has fallen from 273 to 12.

When the property market reopened in May, there were hopes that low-deposit deals would return. However, the few lenders that have reinstated their products have introduced caveats.

Nationwide bought back its 90% mortgages last month, but with limits on how much of the buyer's deposit could be gifted by a family member.

HSBC, meanwhile, temporarily suspended its market-leading 90% deals earlier this week, as it struggles to work through a backlog of applications.

Virgin launches seven-year 90% mortgage

Virgin Money's new seven-year fix is the only deal of its kind currently on the market.

Its seven-year period offers longer-term rate security, protecting borrowers against rises in mortgage costs.

On the other hand, those who want to move within the seven-year period may need to pay an early repayment charge (ERC).

In the first three years, the ERC is 7% of the outstanding mortgage balance, before dropping to 5%, 3% and 2% in years four, five and six. This could mean paying thousands of pounds to be able to get out of the mortgage and move house.

Theoretically, borrowers can 'port' their mortgage to another property, but this will be subject to valuations and affordability assessments,

There are some other limitations, too. The deal is only available on houses, not new-builds or flats, and it has a maximum term of 25 years - well below the 30 or 35-year terms many first-time buyers choose. (The 'term' is the amount of time you pay your mortgage off over. The longer the term, the lower your monthly payments.)

How does the rate compare?

Virgin's seven-year deal is available with an initial rate of 2.99% (with a £995 fee) or 3.09% (no fee).

Until a couple of days ago, HSBC offered the best rates on two-year and five-year 90% mortgages. These products have now been withdrawn, meaning there's little choice remaining for first-time buyers.

Cumberland Building Society and Penrith Building Society are offering market-leading 90% deals, but these are limited to local applicants only.

This means Nationwide now offers the best nationally available 90% mortgages. Its two and five-year fixes are both priced at 3.24% (with a fee of £999). As with Virgin's deal, they have a maximum 25-year term.

Should I apply for the Virgin mortgage?

This depends on your circumstances. Seven-year fixes aren't always suitable for first-time buyers, who may look to move home before the end of the fixed term.

In addition, the maximum term of 25 years may mean some buyers who would ordinarily take out a 30 or 35-year mortgage simply won't be able to afford the repayments.

Fixes of longer than five years can be a good choice if mortgage rates are very low and you're buying your 'forever' home. For first-time buyers, it's likely that neither of these circumstances will apply.

On the other hand, Virgin's deal is one of only a handful of options for first-time buyers with a 10% deposit, so for some it may be the difference between buying a home and missing out.

Have 90% mortgage rates risen since COVID-19?

All of the current market-leading deals are significantly more expensive than those that were available before the pandemic, as shown in the table below.

Fixed termMarch 2020 best rateSeptember 2020 best rateDifference
Two-year1.59% (Halifax)3.24% (Nationwide)+1.65%
Five-year2.15% (West Brom)3.24% (Nationwide)+1.09%
Seven-year2.42% (Virgin Money)2.99% (Virgin Money)+0.57%
10-year2.55% (Virgin Money)3.09% (Virgin Money)+0.54%

Should I save for longer?

If you're thinking of buying your first home with a 10% deposit, you have three options: you can apply for one of the deals currently on the market, hang on to see if cheaper mortgages return in the next six to 12 months, or wait until you've saved a bigger deposit.

Saving a bigger deposit won't be possible for everyone, but if you can stretch from 10% to 15%, you could get a much cheaper rate and make big savings on your monthly repayments.

The table below shows the difference in cost between a 90% and an 85% mortgage.

Fixed termBest-rate 90% mortgageBest-rate 85% mortgageSaving
Two-year3.24% (Nationwide)1.84% (HSBC)1.4%
Five-year3.24% (Nationwide)1.99% (Vernon)1.25%

How parents can help first-time buyers

A report released by Legal & General earlier this week claimed 33% of first-time buyers will rely on help from their parents in the next five years, with parents lending an average of £20,000 towards a house deposit.

For many parents, this simply won't be possible, but there are other ways to help.

Despite the COVID-19 outbreak, some providers are still offering guarantor mortgages, which allow parents to use their savings or property as collateral against their child's mortgage.

Saving a mortgage deposit

Whether you're close to buying your first home or have just started saving, we've got lots of great advice to help you boost your deposit.

If you're in the earlier stages of saving, check out our guide on the basics of saving for a mortgage deposit, and consider the pros and cons of opening a lifetime Isa, which offers a 25% bonus on your savings.

If you're a little further down the line, we can help you find out how to improve your mortgage chances and apply for a mortgage.