You CAN get a mortgage with a small deposit!

Buying a home is no easy feat. You’ll need to save for a deposit – and homebuying fees – at a time when household bills and the cost of living are rising.

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In fact, according to a recent poll we ran on MoneySuperMarket, more than 15% of you felt you would never be able to afford to get on the property ladder and would always have to rent.

But that doesn’t necessarily have to be the case. Contrary to popular belief post-credit crunch, there are plenty of mortgage deals offered by lenders that only require a 5% deposit – and not just the handful on offer through the government’s Help to Buy scheme either. 

In fact, our data at MoneySuperMarket shows there are currently separate 26 mortgage deals which can be taken at 95% of the property price (also known as ‘95% loan to value ratio’ or LTV). We take a look at how this kind of deal could potentially make the difference between buying and renting…

Help to Buy

There has been a wave of movement in the 95% mortgage arena since the second phase of the government’s Help to Buy scheme was introduced last month. This is where the government provides a guarantee to banks and building societies against their 95% loans which is designed to encourage them to lend – and at more affordable rates.

While most of the major lenders have pledged to sign up to this part of the Help to Buy scheme (with the exception of Nationwide), only two – Halifax and NatWest/RBS – have actually put their cards on the table and revealed what rates they will be offering to buyers with a 5% deposit.

Halifax has launched a two-year fixed rate deal at 5.19% with a £995 fee under Help to Buy, while RBS and NatWest went a stage better with a two-year fixed rate at 4.99%, with no fee.

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95% deals outside Help to Buy

Neither of these lenders offered 95% mortgages before Help to Buy was launched. But, while more choice in the 95% market is clearly a good thing, don’t head straight for Help to Buy as you might be able to get a better deal outside the scheme.

Clydesdale and Yorkshire banks for example – which were already offering these larger LTV mortgages – recently pegged down the rate on their three-year fixed rate 95% deal to 4.99% and it doesn’t charge a fee either. You can read more about this deal here.

And if you just want to fix in for two years with your 5% deposit, you can pay even less. For example, Hanley Economic Building Society is offering 4.89% over the term for fees of just £350.

You can compare more 95% mortgage deals with our dedicated tables.

What are the drawbacks of 95% deals?

The downside with 95% mortgage deals is that they are considerably more expensive than those available with a larger deposit.  We have flagged up the best deals here but, according to our data at MoneySuperMarket, the average rate for mortgages with a 5% deposit is a relatively costly 5.15%. This compares to an average rate of just 2.71% if you have a hefty 40% deposit and 3.31% if you have a 20% deposit.

But, while you might be a long way off from raising money of this kind, here’s where it gets frustrating. If you could raise just another 5% and put down 10% of the total property value, your average rate would drop from 5.15% to 4.39%.

And the difference between the top deals at these deposit levels is stark too. Furness Building Society, for example, is offering a best buy two-year fixed rate priced at 3.54% with 10% of the property value, compared to Hanley’s rate of 4.89% if you can only muster a 5% deposit. On a repayment mortgage of £200,000 taken over 25 years, taking the Furness deal would save you £150 a month in interest – not to mention of course, also having a smaller mortgage.

There are ways you can still access more competitive rates despite only having a 5% deposit, though. Some lenders offer special deals which involve your family putting their savings with the lender as a guarantee. Their cash will still stay intact, and even earn interest, but you will benefit from the kind of rates you’d get had that money been used as a deposit. You can read more about these schemes here.

Do your sums

If you can’t get this kind of help, however, don’t let the higher interest rate of a 95% deal necessarily put you off buying – especially if you are going to be paying rent anyway. Average rents are on the up, increasing by 0.4% in September, according to the HomeLet Rental Index to reach a current £854 a month – that’s 5.6% higher than this time last year. 

It could be that your mortgage, even at a 95% rate, is the same or even less as you would pay in rent anyway.

And property values are increasing too. According to the latest data from Halifax, house prices in the three months to October this year were 1.6% higher than in the previous three months and 6.9% higher than the same three months last year. So, if homeownership is a goal of yours, there is a risk that, if you save for another year before you make the move, the extra cash may still only equate to a 5% deposit as the house prices will be more expensive anyway.

That said, buying a home is not something to be rushed, so do your homework first. A good place to start is with our brand new MoneySuperMarket first-time buyer hub which has all the information you’ll need.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct

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