Rise in low deposit mortgage deals

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For saleThe availability of low deposit mortgage deals has jumped by more than a third in the last year following the launch of the Government's flagship scheme to revive the housing market, a financial website has found.

There are currently 443 mortgage products on offer for people with a 5% or 10% deposit, marking a 38% increase compared with a year ago, according to Moneyfacts' figures.


The findings follow a recent report from the Council of Mortgage Lenders (CML) showing that the typical deposit needed by a first-time buyer has edged down in recent months from 20% to 17%.

Mortgage availability has seen a sharp upturn since the Government launched its Funding for Lending initiative last August, which gives lenders access to cheap finance in order that they pass on the benefits to borrowers.

Moneyfacts found that the average rate on a five-year fixed-rate mortgage has dropped to 4.92% for someone with a 10% deposit, from 5.60% a year ago. The typical rate on offer on the same type of deal for someone with a 5% deposit has edged down from 5.82% last July to 5.13% today.

There have also been signs of lenders bringing out more innovative deals in recent months. Leeds Building Society announced today that it is extending a range of products which allows borrowers to delay the interest kicking in on their mortgage payments.

Leeds has added a new two-year fixed-rate product to its three and five-year deals, allowing borrowers with deposits as low as 10% to pay 0% interest for up to six months, so they can cut their initial costs and spend money on redecorating or buying new furniture after moving house.

The interest rate paid by borrowers for the rest of the mortgage depends on the length of the interest-free period they have chosen.

The Building Societies Association (BSA) reported yesterday that mutuals approved 165,800 mortgages in the first half of the year, marking an increase of almost one fifth (17%) compared with a year ago.

The BSA said first-time buyer lending now accounts for almost one third of all home loans approved by the sector, showing that building societies are stepping up their efforts to help people with lower deposits.

Borrowers with smaller deposits will get another helping hand next year with the launch of the Government's flagship Help to Buy scheme, which will underwrite £130 billion of low-deposit mortgage lending with state guarantees.

Concerns have been raised that this scheme must not lead to a "property bubble", with people overstretching themselves as house prices push up. A study released by Halifax last week found that the typical house price paid by a first-time buyer is 4.26 times their annual earnings, well above an average of 3.23 over the last 30 years.

More than half (51%) of this year's first-time buyers are estimated by Halifax to have bought homes which were above the £125,000 stamp duty threshold, at which a rate of 1% kicks in, up from 44% a year ago.

Samuel Tombs, a UK economist at Capital Economics, said: "In the months ahead, mortgage demand should continue to recover in response to the fall in mortgage rates, the Treasury's Help to Buy scheme and the strengthening recovery in the wider economy.

"That said, any recovery in housing market activity is likely to be modest and gradual, given that banks are still trying to improve their capital positions."