Updated January 8, 2021
First-time buyers can move up the property ladder again with a down payment as low as 10%. However, the interest rates they are currently facing could exceed 5%. Are there still affordable first mortgages? Article by Nick Green.
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After several months of being left out in the cold, first-time home buyers can now borrow up to 90% of a property’s value. One of the immediate consequences of the Covid epidemic in the spring was the abrupt withdrawal of the highest value-added mortgages (LTVs), as lenders scrambled to reduce their exposure to risk. Nine of the 10 90% mortgages have been taken off the market, and 95% of mortgages have all but disappeared. Now that the banks are starting to relax a bit, the 90% are emerging from their hiding places. But the celebrations will be muted, as the deals aren’t exactly generous.
Halifax and Lloyds Bank charge 3.54% for their two-year fixed rate mortgage at 90%, with five-year corrections offered at 3.59%. Both also charge a handling fee of £ 995. TSB is offering one at 3.64% (but no charge), Yorkshire Building Society is offering 3.69% with a charge of £ 495, and Accord is also offering 3.69% but with a charge of £ 995. Five-year corrections have higher interest rates (but not much, and rarely more than 0.1%) and generally have the same fees.
However, even these aren’t the most expensive 90% mortgages. Aldermore is asking 5.18% for a two-year fix, plus a fee of £ 999. Rates have not exceeded 5% since 2013. Offers like these are so much more expensive that borrowers are only likely to resort to them after failing with the biggest lenders – so it’s likely their criteria of loan are a little less strict.
What are the best 90% fixed rate deals available?
Too bad for the dearest – what about the most generous? The two lowest two-year 90% fixes to emerge to date are from Platform and Nationwide. The platform offers 3.24% with a charge of £ 1,499, 3.74% no charge or 3.34% with an average charge of £ 999. Nationwide is offering 3.49% with a fee of £ 999, or 3.74% free of charge. Nationwide also interesting mortgage tracker options: 3.59% with a charge of £ 999, or 3.84% free of charge. It should be noted that Nationwide has also withdrawn its controversial (and some would say absurd) ban on 90% of mortgage customers using deposits that are more than 25% a gift from parents. Now these buyers no longer have to prove that they have saved at least 75% of their deposit themselves, which will be a huge relief.
How do these “generous” mortgage offers compare to the average? The difference is still quite dramatic. For example, an 85% Nationwide mortgage (with the other criteria being the same) would only have an interest rate of 2.84% with a charge of £ 999 – a total difference of 0.75%, or nearly £ 2,600 in repayment costs over the two years of the fixed term, based on a £ 200,000 property. So by saving an additional £ 10,000 on deposit (£ 30,000 versus £ 20,000) the buyer is saving over £ 100 per month.
An 80% Nationwide mortgage would save even more: a difference of £ 4,875 over the two-year period, or over £ 200 per month. So, as welcome as the return of 90% mortgages is, they also hammer home the old message: the bigger your deposit, the better.
Remember the “5% rule”
However, this is not just a case where more deposits are always much better. For example, when buying a home for £ 200,000, having a deposit of £ 29,000 may not turn out to be much better than having one of £ 20,000. There will certainly be some advantages – the loan size will be smaller, which means slightly lower repayments, and the lender may be slightly more inclined to lend you. However, you will still have the same interest rates as someone with a £ 20,000 deposit because you haven’t crossed the magic 5% threshold.
Typically, lenders will offer better mortgage rates for every 5% of your deposit. So, for example, a 15% deposit will attract better offers than a 10% deposit, and a 20% deposit will result in even better rates, and so on. This is why it is important to think and plan very carefully both when saving a down payment, when to buy, which house to buy, and finally when negotiating the price. The 5% rule can make a real difference in terms of affordability, as this example shows:
What a difference does a rate make
Rob and Sarah saved a deposit of £ 30,000. They had an offer accepted on a £ 200,000 house and offered a mortgage for £ 170,000. This means their down payment is 15% and their mortgage is 85%. This opens up the cheapest mortgage deals for them so that they are offered a rate of 2.84%.
This means Rob and Sarah would have mortgage payments of around £ 792 per month.
However, their home purchase fails on this occasion, so they have to look for another property. They find a house they like even better, but the best price they can get is £ 215,000. This means that they would have to borrow an additional £ 15,000, which is only 14% of their deposit. That doesn’t sound like a lot, but with an 86% mortgage, they are now only eligible for the most expensive mortgage deals.
The best rate their lender will offer them now is 3.49%. This means monthly repayments of £ 925 – £ 133 more than before. Even if they borrowed the same amount, that higher rate would mean paying an extra £ 63 per month.
For people who are already straining their finances, that extra amount can be difficult to achieve. Worse yet, it could cause the lender to reassess whether Rob and Sarah can really afford that mortgage.
In summary, if your deposit is near a 5% limit, it can severely constrain your home buying budget. Even if you could in theory afford a slightly more expensive house, the mortgage bands might not allow you to do so. Solutions include trying to save more deposits, haggle harder on the price to see if your seller drops more, cut your spending further (to improve your affordability), and have your mortgage broker try to find a better rate. mortgage from another provider.
How to make an LTV mortgage more affordable
If you really can’t save enough for a 15% deposit, then you might have no choice but to settle a 10-15% deposit and take one of the 90% mortgage offers. . However, you may not necessarily have to pay the extremely high rates, if you are lucky enough to be able to enlist some help from your family.
Parents or guardians can help first-time home buyers in a number of ways without having to pay a large lump sum. There are other methods that the “ Mommy and Daddy Bank ” can help with, such as:
- Guarantor mortgages
- Family mortgages
- Family compensatory mortgages
A collateral mortgage is where one or more people (usually parents) agree to be responsible for mortgage payments if the mortgage holder cannot pay. Guarantors must place their own assets (i.e. usually their own home or other suitable property) as collateral. This type of mortgage can get you a 100% mortgage (i.e. no deposit), but if you have a small deposit it can also help you get better mortgage rates than those that would be offered to you otherwise.
Another way parents could help is through a family deposit mortgage. This arrangement allows parents to use part of the equity in their own home as all or part of the deposit for the first-time buyer. This can allow the buyer to raise a higher down payment and access better rates. But, as with the collateral mortgage, the parents’ home can be at risk if repayments are not maintained.
A third way is a family compensatory mortgage. This may be suitable for parents who have a lump sum available, but do not want to give it directly to their child who buys the house. Instead, the money is kept in a bank account linked to the mortgage. This reduces the loan amount on which the lender charges interest. For example, if the loan is £ 170,000 and there is £ 20,000 in the cleared bank account, interest will only be charged on £ 150,000 (i.e. £ 170,000 – £ 20,000). This reduces the size of the monthly repayments. Parents can still access their savings if needed, but withdrawing money will increase the amount the buyer will have to pay interest on.
Can I still get a 95% mortgage?
Although 90% of mortgages have made a cautious return and there are plenty of 95% mortgages for existing homeowners looking to remortgage, the 95% mortgage is still nearly impossible to find for first-time buyers. , unless you use one of the methods. described above to get help from the family. However, at the time of writing, there are potentially a handful of such offers for those who are able to shop around with the help of a mortgage broker.
Another ray of light for those with low deposits is the proposed new government program Generation purchase, which promises affordable fixed rate mortgages at 95% for first-time buyers – possibly. Currently, no details or timelines have been released.
In the meantime, your best chance of getting an affordable and sufficient bad credit loans is to contact a mortgage broker.
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