5% deposit mortgage availability hits two-year high – but rates keep rising

The number of mortgages available to people buying with a 5 per cent deposit has hit its highest point in more than two years, according to rates watchdog Moneyfacts.

There are currently 361 mortgage transactions covering 95 percent of the value of a property, the highest figure recorded since May 2022.

Lenders sometimes withdraw their lowest-deposit mortgages from the market in times of economic uncertainty because they view them as riskier.

For example, at the beginning of the pandemic in the summer of 2020, the number of mortgages with a 5% interest rate was reduced to almost zero. A similar number of mortgages with a 5% interest rate were also withdrawn after the 2022 mini-budget.

The increase in available listings could therefore reflect a more positive sentiment around the real estate market.

Rachel Springall, finance expert at Moneyfacts, said: ‘Borrowers with a limited deposit may be pleased to see an increase in the number of mortgages available with a loan-to-value ratio of 95 per cent this month, hitting a two-year high.

‘There is plenty of room for growth in this area of ​​the market as it currently accounts for just 5 per cent of all offerings available to borrowers on fixed and variable rate mortgages.’

However, while the number of mortgage products available to buyers with smaller deposits appears to be increasing, average mortgage rates are rising.

This is despite recent mortgage rate cuts by Barclays, HSBC and others.

What is the average 5% mortgage rate?

The average two-year fixed rate for someone buying with a 5 per cent deposit is 6.26 per cent, up from 6.2 per cent last month, according to Moneyfacts.

This means the average home buyer with a 5 per cent deposit, requiring a £200,000 mortgage over a 25-year term, will pay £1,313 per month.

However, five-year contracts offer a cheaper alternative. The average five-year interest rate is 5.78 per cent, according to Moneyfacts, up from 5.73 per cent last month.

For the same buyer, that would mean paying £1,262 per month.

Mortgage rates for buyers with smaller deposits tend to be higher.

For buyers with a deposit of at least 40 percent, the average two-year fixed rate is 5.45 percent and the average five-year fixed rate is 5.06 percent. These rates have not changed since last month.

But most buyers should be able to get much better than average results if they talk to a mortgage broker who can explore the entire market.

The lowest two-year fixed rate for someone buying with a deposit of 40 per cent or more is 4.63 per cent, while the lowest five-year fixed rate is 4.2 per cent.

The same goes for those who buy with just a 5 percent deposit.

The lowest two-year fixed rate is 5.55 percent, while the lowest five-year fixed rate is 5.2 percent, although both include origination fees that should be taken into account.

> Check out the best mortgage rates here

Are mortgage rates about to change?

Over the past two weeks, several banks have cut their interest rates. At the end of last week, Yorkshire Building Society, HSBC and Barclays all cut their interest rates. This was followed by similar moves by Santander and NatWest.

The downward trend has occurred due to changing expectations about the future of interest rates. Market interest rate expectations are reflected in swap rates.

These swaps are influenced by long-term market projections for the Bank of England base rate, as well as the broader economy, internal bank targets and competitors’ pricing.

As of July 4, two-year swaps are at 4.45 percent and five-year swaps are at 3.95 percent.

Price war: Barclays, HSBC and Yorkshire Building Society have cut rates, following the example of Santander and Halifax

This figure represents a decrease from a month ago, when two-year swaps were at 4.61 percent and five-year swaps were at 4.05 percent.

“Lenders have been repricing their trades in response to volatile swap rates, which calmed during June,” Springall added.

“If swap rates reach an inflection point and fall, then there will be an expectation that fixed mortgage rates will fall, but it may be a slow and steady process that has a large impact on overall average rates.”

Markets are expecting two base rate cuts this year, with further cuts forecast for next year.

Nicholas Mendes, mortgage technical manager at broker John Charcol, believes base rate cuts combined with a more optimistic outlook for the UK economy could start to see mortgage rates fall further.

“The expected cuts in the Bank of England’s bank rate are already reflected in current fixed-rate mortgage prices,” Mendes said.

“However, as the bank rate declines, the market is likely to gain more confidence in the prospect of further reductions, potentially leading to further cuts in fixed mortgage rates of around 0.5 per cent this year.”

Mendes thinks we could see Five-year yields could fall to 3.75 percent and two-year yields to 4 percent by the end of 2024.

‘This decline is driven by anticipated bank rate cuts and growing market confidence in continued rate reductions.

‘This would provide significant financial relief for homeowners, encourage more first-time buyers to enter the market and generally boost housing market activity, contributing positively to the broader economy.’