Mortgage lenders slash rates for borrowers with 5% deposits

A mortgage price war to attract first-time buyers with deposits as low as 5% is intensifying, with providers slashing their rates, analysis has found.

The rate gap between the average two-year fixed-rate mortgage on the market for borrowers with a 5% deposit, and the typical two year-fix for those with a 10% deposit, is now at its smallest in six years, Moneyfacts.co.uk found.

This is despite borrowers with the smallest deposits often being seen as more “risky” and recent reports suggesting uncertainties relating to the economy and Brexit are having an impact on the housing market.

The 0.65 percentage point gap in rates is smallest Moneyfacts has seen since February 2013. The average two-year fixed rate for borrowers with a 5% deposit is 3.30%, while the average rate for borrowers with a 10% deposit for this type of mortgage is 2.65%.

The narrowing rate gap has been driven by “healthy competition” by providers looking to attract people with a 5% deposit, Moneyfacts said.

Darren Cook, a finance expert at Moneyfacts.co.uk, described first-time buyers as the “lifeblood of the mortgage market”.

He said: “Providers need to factor in the greater potential of default on higher-LTV (loan-to-value) mortgages, which is why rates are typically higher at 95% LTV – but as we’ve seen, they’re increasingly willing to sacrifice these margins in order to compete.”

Mr Cook said the average two-year fixed-rate mortgage for borrowers with a 10% deposit has “changed little” since October 2017, increasing from 2.62% by 0.03 percentage points to reach 2.65% now.

Over the same period, the average two-year fixed mortgage rate for borrowers with a 5% deposit has fallen significantly, from 4.19% in October 2017 to 3.30% now.

Mr Cook said: “This is fantastic news for potential first-time buyers who are looking to find their first step on the housing ladder.

“However, even though mortgage rates at the 95% LTV tier are falling, it may not be that simple.

“Since the financial crisis, the Financial Conduct Authority has introduced clear affordability measures that mortgage providers must follow, so potential first-time buyers will still need to jump through several affordability hoops before they find themselves on the property ladder.”