Interest rates on 95% mortgages are tumbling in price as lenders battle to offer the best prices to first-time buyers with small deposits.
Data from Moneyfacts shows the average rate on a 95% mortgage has dropped by more than half a percent previously six months, meaning first-time buyers could secure a better deal than ever before.
Here, we explain the effect of greater competition around the price of mortgages, and offer suggestions about the choices available to buyers with small deposits.
95% mortgages getting cheaper
The average rate on the 95% fixed-rate mortgage has came by 0.54% in the past six months, falling from three.95% to three.41%, based on figures from Moneyfacts.
The table below shows how this significant drop is an outlier inside a market where mortgage rates at other loan-to-value (LTV) ratios have moved very little.
Why are low-deposit mortgage rates dropping?
Before 2022, 95% mortgages were neglected by some of the biggest lenders, who have been focusing their attention on homebuyers with bigger deposits.
Last year, however, competition for small-deposit buyers increased significantly – and the trend looks to be continuing into 2022. In January alone, the amount of 95% mortgages on the market increased from 298 to 325.
Cheapest rates on 95% mortgages
Average rates on 95% mortgages may be dropping, but how about the lowest introductory rates?
The table below shows the cheapest initial rates available right now on two and five-year fixes.
|Provider||Initial rate||Revert rate||APRC*||Fees|
Things to look for when comparing 95% mortgages
High revert rates
As you can observe, the cheapest rates above are available from building societies, though there are some major banks lurking a little way behind.
If you choose to borrow from the smaller building society, it’s particularly important to remortgage after your fixed term, as in most cases building societies have revert rates (also known as standard variable rates) which are considerably greater than many of the larger banks.
Maximum lending term
In yesteryear, it was standard to take out a mortgage with a 25-year term (the time over which you pay the loan back). However, with house prices having risen a lot faster than wages over the past few years, buyers with small deposits are increasingly opting for terms of 30 or 35 years, and in some cases a lot longer.
While most banks offer maximum limits (theoretically a minimum of) of 35 or 40 years, some of the smaller building societies impose maximum relation to 25 years on their first-time buyer deals.
Some from the cheapest first-time buyer mortgages have rules on the minimum or maximum loan size.
For example, the Loughborough offer the table above only accepts applications up to and including maximum loan of lb350,000.
While this would be an ample amount in many areas of the UK, may possibly not be enough if you’re buying a home working in london.
Should you save for longer?
In recent years, the space in cost between 90% and 95% mortgages has narrowed, but it’s still possible to find lower rates if you’re able to save a little longer and build up a larger deposit.
Right now, the typical rate on a 90% deal (2.69%) remains around 0.7% cheaper than a 95% product (3.41%) – a spot that potentially offers big savings over time.
Alternatives to 95% mortgages
If you’ve got your heart focused on buying a property now, there are some popular schemes that could work as options to a traditional 95% mortgage.
Help to Buy
The Assistance to Buy scheme allows borrowers in England and Wales to profit from a 20% equity loan from the government when buying a new-build home. In Scotland it’s 15% and in London, where housing prices are higher than the rest of England, it’s 40%.
This means use a 5% deposit and obtain a mortgage for the remaining amount, potentially opening up the prospect of lower rates.
While Help to Buy continues to be incredibly popular – it’s been used by a lot more than 180,000 people in England so far – it has faced some criticism around its impact on inflating the cost of new-build properties, and some homeowners have had issues when remortgaging with an outstanding equity loan.
Shared ownership schemes permit you to buy a share of a property from a housing association and pay rent around the rest.
For example, you can buy 25% of a lb400,000 property for lb100,000. You’ll use a 5% deposit, remove a home loan of lb95,000 for the share and pay rent around the remaining 75%.
There’s also the chance to buy extra chunks in the future, a procedure known as ‘staircasing’.
A word of warning, however. These schemes may become very costly when you factor-in the mixture of mortgage repayments, rent costs and service charges, and some developments require you to purchase a higher ‘minimum’ share, sometimes up to 50%.
Advice on your mortgage options
If you’re considering buying your first home, it may be useful to make contact with a whole-of-market mortgage broker, who are able to advise you on schemes that may help and assess all the deals on the market to find the right choice for you.