First-time buyers see rates on 5% deposit mortgages hit lows not seen for at least a decade but government’s guarantee scheme falls flat
Home loans for first-time buyers are at their cheapest in at least a decade, new figures show.
The average rate on a two-year fixed mortgage with a 5 per cent deposit is currently 3.09 per cent, according to financial information website Moneyfacts.
This is a drop from November’s 3.22 per cent and is the lowest rate since its records began in 2011.
The typical five-year fixed rate on the same terms is 3.39 per cent, down from 3.51 per cent in November and also a decade low.
Cheaper low-deposit mortgages will be welcomed by first-time buyers getting on the ladder
Rates on 10 per cent deposit mortgages have also dropped in the last month, with two-year fixes falling from 2.54 per cent to 2.51 per cent, and five-year fixes dropping below 3 per cent to 2.95 per cent, down from 3.02 per cent in November.
This is a sharp contrast to what is happening at the other end of the housing ladder.
Mortgages for those with large deposits hit rock-bottom lows of less than 1 per cent earlier in the year, but these are now on the rise as lenders anticipate an increase in the base rate.
One mortgage market expert said rates could potentially go even lower.
‘Five per cent deposit mortgages are cheaper now than they have been in a long time, even though the general trend on pricing for mortgages with big deposits is upwards,’ says Mark Harris, chief executive of mortgage broker SPF Private Clients.
‘The latter have been very aggressively priced in recent months as lenders have competed for business.
‘Lenders haven’t been so aggressive on pricing [low-deposit] products, partly because of the lack of competition as they haven’t been keen to lend low-deposit mortgages. If they want to cut rates a bit more, they can, and still make a profit.’
In further good news for those looking to get on the housing ladder, Moneyfacts said 76 new mortgages requiring deposits of 5 or 10 per cent were launched in the last month alone, bringing the total to 1,059.
In December 2020, there were only 96 such mortgages available after lenders pulled these products from the market during the early part of the pandemic.
Government mortgage scheme yet to catch on
But while first-time buyers are enjoying a more favourable mortgage environment, it has emerged that few have made use of the Government’s own scheme to help them get on the housing ladder.
The Treasury has released figures detailing how widely used its Mortgage Guarantee Scheme, launched in April 2021, has been.
They show that just 812 mortgages were taken out under the scheme between 19 April and 30 June 2021, with a total value of £185million.
This represented 0.7 per cent of all residential mortgage completions in the UK from the beginning of April to end of June 2021, the Treasury said.
Chancellor Rishi Sunak launched the Mortgage Guarantee Scheme in March
In addition, only 82 per cent or 666 borrowers that used the scheme were first-time buyers, as home movers with low deposits were also allowed to use it.
Under the scheme the Government will partly insure mortgages with 5 per cent deposits on lenders’ behalf, meaning the bank or building society would recover more of its losses if the borrower defaulted.
It was hoped that the scheme, which was launched by Rishi Sunak in the Budget in March, would give lenders more confidence to provide these higher-risk loans at a time when many were reticent to do so.
However, lender confidence began to recover shortly afterwards as pandemic restrictions lifted, and many banks and building societies subsequently started to offer 5 per cent deposit products independently of the scheme.
The Treasury said the low numbers were ‘expected owing to the infancy of the scheme at this point in time and the average length of time to complete a house purchase.’
However, mortgage industry experts have argued that the scheme was not appealing to first-time buyers because of high rates, and because they preferred the security of putting down a 10 per cent deposit if they could.
Rates on 5 per cent mortgages, whether Government-backed or not, were higher than they are now during the April to June period that the Treasury figures cover.
In May, the typical two-year fix on a 5 per cent deposit mortgage was 4.02 per cent, and the five-year fix 4.17 per cent, according to Moneyfacts.
On top of this, the best-buy rates were rarely found on the Government-backed mortgages.
Jonny Dyson, of estate agent Winkworth’s Acton Office, said: ‘At one point, the 5 per cent deposit government-backed scheme had interest rates of more than double the equivalent 10 per cent deposit mortgages offered by the majority of lenders.
‘Buyers would be choosing between a 3.99 per cent rate for a 5 per cent deposit, versus a 1.69 per cent rate for a 10 per cent deposit.
‘Borrowing £500,000 with the 5 per cent scheme would cost them £99,750 in interest over a five-year fixed period, as opposed to just £42,250 if they had a 10 per cent deposit.
‘They would therefore be far better off trying to save the extra 5 per cent (£25k in this example) and get a 10 per cent deposit deal. The choice was between saving an extra £25,000, or paying an additional £57,500 in interest.’
It can also be difficult for first-time buyers to qualify for 5 per cent deposit mortgages.
Most lenders will only allow them to borrow 4.5 times their earnings, which may not be enough to cover 95 per cent of the cost of a home.
A couple purchasing a home at the UK average house price of £264,000 would need to earn £58,666 to get a 5 per cent mortgage, which is more than double the average UK salary of £25,971.
First-time buyers are paying a higher proportion of their annual earnings to service their mortgages than they have been in the past few years, thanks to rising house prices
Hina Bhudia, partner at Knight Frank Finance, said borrowers were also reticent about taking such a highly-leveraged mortgage at a time when their financial futures were uncertain.
‘With the Mortgage Guarantee Scheme becoming available during the height of the Covid-19 pandemic, it was intended to support those struggling to get on the housing ladder,’ she said.
‘However, with so much uncertainty and many unknown factors, combined with first time buyer’s typically having little experience in property, many were unsettled as to whether they should be buying at 95 per cent – with the fear of ending up in a negative equity situation.’
Although interest rates are coming down, Nationwide research published last week found that rising house prices and stagnating salaries mean first-time buyers are still paying a higher proportion of their earnings to service their mortgage than they have been for most of the last decade.
How would an interest rate rise affect first-time buyers?
As a result of rising inflation, it has been speculated that the Bank of England could increase its base rate as early as December. This would push the cost of a mortgage up.
Nationwide recently looked at the impact a rise in interest rates might have on first-time buyers’ mortgage payments, and specifically the proportion of take-home pay that the typical mortgage would need to service.
It found that this would be relatively modest, especially given that the majority of mortgages are on fixed rates.
If rates went up by 0.4 per cent the proportion of wages spent on the mortgage could increase from 31 to 32 per cent of take-home pay, or an extra £34 a month, Nationwide said.
However, if rates increased by 0.9 per cent this could increase by 34 per cent or £79 a month.
Its calculations assumed a 20 per cent deposit mortgage over a 25-year term.