New data suggests first-time buyers are struggling to access much-vaunted low deposit deals
Although the return of five per cent deposit, many backed by the government’s Mortgage Guarantee Scheme, earlier this year was heralded as a major victory for first time buyers, new data from online mortgage broker Trussle suggests that, in July, just one per cent of mortgage completions on its books were for buyers with a five per cent deposit, despite as many as 26 per cent of enquiries coming from would-be buyers in this position.
This was despite lenders flooding back in to the low-deposit market to much fanfare in recent months, after they withdrew such products amid concerns about people’s incomes at the beginning of the pandemic.
A total of 49 lenders currently offer five per cent deposit mortgages. Many of these are backed by the government’s Mortgage Guarantee Scheme, which was launched in April to encourage banks and building societies to resume low-deposit loans.
Trussle said it had had a high level of enquiries about five per cent deposit mortgages this year, peaking in March when the government scheme was announced, suggesting that while many first-time buyers are interested in five per cent deposit mortgages, they are not able to qualify for one based on their finances.
Because most lenders will only lend a buyer around 4.5 times their annual salary as a mortgage – and sometimes less on five per cent deposit products – getting enough money together to buy with a five per cent deposit can be a challenge. This is especially true in more expensive locations.
For example, to purchase a £250,000 home with a five per cent deposit of £12,500, the household income would need to be almost £53,000 per year.
Record increases in house prices in the past year and a half, which are out of kilter with growth in wages, have made the situation even more difficult.
Many five per cent deposit mortgages are subject to stricter lending criteria, require higher credit scores and cannot benefit from gifted deposits. In addition, flats and new build properties are often ineligible for the deals.
Miles Robinson, head of mortgages at Trussle, said: “The return of 95 per cent mortgages earlier this year was greeted with much anticipation. With greater application scrutiny and soaring house prices, first time buyers were facing a challenging market and these [low-deposit] deals are crucial to ensuring home ownership remains an accessible dream for all.
“There is clearly an appetite for low-deposit mortgages, as we have seen significant demand for 10 per cent deposit deals, however, after making a real comeback in March it is disappointing that five per cent deals are failing to make the difference we hoped to see.”
He said that around 60 per cent of all enquiries it received about five per cent deposit mortgages were from first-time buyers. This kind of product is popular with them as they do not have the benefit of equity from an existing home.
Those who can save slightly higher deposits seem to be having more success getting approved for a mortgage, with 10 per cent of Trussle’s June completions on a 10% basis.
Buyers with a 10 per cent deposit are also able to access significantly better interest rates. The lowest rates available on five per cent deposit mortgages do not go much below three per cent. Saving a 10 per cent deposit, on the other hand, will mean the rates on offer improve dramatically. The lowest rate available on a two-year fixed, 10 per cent deposit mortgage with Natwest, for example, is currently 2.13 per cent.