Focus on: Grab a best buy mortgage with 5% deposit

Good news for cash-strapped first-time buyers! Deals that only require a 5% deposit are getting better.

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And this isn’t necessarily anything to do with the government’s Help to Buy scheme which has now been introduced in full.

Clydesdale Bank, for example is offering a fixed rate of 4.99% for three years in exchange for just 5% of the property value. We’ve taken a closer look at the deal so that you can work out whether or not it could be your chance to get out of rented accommodation and into your own home.

What’s the deal?

Clydesdale’s 95%, three-year, fixed rate mortgage - which is also offered by its sister bank, Yorkshire - comes with an interest rate of just 4.99%, fixed until December 31, 2016.

Other advantages of this deal include that it comes with no arrangement fee, and that you will even receive £250 cashback on completion to help with moving costs.

The lender also provides a free valuation, and the option of adding your legal fees to the amount borrowed – although a higher interest rate will apply if this pushes the total amount borrowed to more than 95% of the property’s value.

Once the three-year term comes to an end, you will be automatically moved onto the standard variable rate (SVR), which is currently 4.95%, unless you take action to switch to a new deal. And should you be in a position to make overpayments after this time, you can do so penalty free.

Any catches?

As with most fixed rate deals, Clydesdale’s mortgage comes with early repayment charges (ERCs) that apply during the three-year term of the deal.

So, should you need to sell up, receive a windfall that allows you to clear your mortgage or wish to switch lenders within that time, you will therefore have to pay a penalty.

The ERCs are on a sliding scale: those redeeming in the first year will pay 6% of the account balance, while those redeeming in the second year will pay 5% and third-year redemptions will result in a 4% charge.

The deal is also limited to people who have never had a mortgage before, or have only held a mortgage for up to 12 months, meaning that most existing homeowners need not apply.

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What’s the verdict?

People with small deposits of just 5% of a property’s value to put down on purchase are limited to a relatively small number of 95% mortgages, including a lot that rely on funds from the government or the buyer’s friends and family.

But while the lowest mortgage interest rates are offered to those with big deposits of say 40% or more, this deal from Clydesdale shows that it is still possible to pay interest at less than 5%, even if you need to borrow 95% of the home’s value.

This is a very competitive rate for a deal of this kind – especially as that is fixed for three years.

And fixing for the first three years of home ownership may prove a sensible move because it allows first-timers to relax in the knowledge that their mortgage repayments will not go up during that time, no matter what happens to interest rates.

Top tip!

Being able to put down a bigger deposit than 5% will mean more competitive deals will be available to you. It may therefore be worth saving up a bit longer to gain access to lower interest rates that will save you money in the long term.

But it might not always the best strategy. House prices are now rising again in some parts of the country, so if you are looking to buy somewhere such as London getting in now with a smaller deposit could prove more sensible than continuing to save. 

Check out our mortgage channel for the best deals

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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