Mortgages with 5 percent deposits made up just 1 percent of total lending last month, according to a broker, despite their yields being hailed by the government as the way to “turn generation rent into revival purchase.”
In July, only one in 100 mortgages was on the books for buyers with 5 percent deposits, new data from online broker Trussle shows.
This is despite the fact that lenders have been flocking back to the low-deposit market in recent months after withdrawing such products at the start of the pandemic amid concerns about people’s incomes.
Locked out: New buyers may find that the amounts are incorrect when applying for a mortgage with a 5 percent down payment because the affordability criteria are strict
A total of 49 lenders currently offer 5 percent deposit mortgages. Many of these are backed by the government’s mortgage guarantee scheme, launched in April to encourage banks and building societies to resume low-deposit lending.
Trussle said there were many questions about 5% mortgages this year, peaking in March when the government settlement was announced.
In that month, they made up 26 percent of the total number of leads.
This suggests that while many new buyers are interested in 5 percent mortgages, they may not qualify for a mortgage based on their finances.
Because most lenders lend a buyer only about 4.5 times their annual salary as a mortgage — and sometimes less on 5 percent deposit products — it can be challenging to raise enough money to buy with a 5 percent down payment. This is especially true in more expensive locations.
For example, to buy a £250,000 house with a 5 percent down payment of £12,500, the household income would have to be close to £53,000 a year.
The record house price increases over the past year and a half, which are not in equilibrium with wage growth, will complicate this situation.
Many 5 percent deposit mortgages are subject to stricter borrowing criteria, require higher credit scores, and cannot take advantage of gifted deposits.
In addition, flats and new-build homes are often not eligible for the deals.
Miles Robinson, head of mortgages at Trussle, said: “The yield of 95 percent mortgages earlier this year was greeted with great anticipation.
“With more control over applications and rising house prices, first-time buyers were faced with a challenging market and this [low-deposit] deals are crucial to ensuring home ownership remains an accessible dream for everyone.
It’s disappointing that 5 percent deals aren’t making the difference we hoped
Miles Robinson, mortgage broker
“There is clearly demand for low-deposit mortgages as we’ve seen significant demand for 10 percent deposit deals, but after a real comeback in March, it’s disappointing that 5 percent deals aren’t making the difference we’d hoped to see.”
He said that about 60 percent of all the inquiries it received, about 5 percent deposit mortgages came from first-time buyers.
These types of products are popular with them because they do not have the advantage of the surplus value of an existing home.
The choice for 5 percent deposit mortgages may also have played a role in the low take-up.
Although many lenders are again offering products for people with lower deposits, the range of products is still relatively small.
For example, in July there were 372 5 percent deposits on the market, compared to a peak of 949 in November 2019.
Buyers with a 10 percent down payment do better
Those who can save slightly higher deposits seem to have more success getting approval for a mortgage.
Trussle said 10-percent mortgages have been a popular choice of late, accounting for 10 percent of completions in June 2021 — the highest rate since August last year.
Being able to save a slightly larger down payment also gives buyers access to significantly better interest rates.
Since their reintroduction, interest rates on 5 percent deposits have fallen about 1 percent, meaning the lowest rates are around 3 percent.
For example, Coventry Building Society offers a two-year fix of 2.95 percent, with a fee of, say, £999, while Platform offers a deal of 3.09 percent with a lower fee of £900.
Matt Coulson, principal at brokerage Heron Financial, said the higher rates — and therefore higher monthly payments — could also deter some buyers.
‘With 5 percent deposit mortgages, either under the government’s mortgage guarantee scheme or with lenders’ own products, the high interest rate is often the main barrier.
“These products are often used as a conversation starter with mostly novice buyers, who upon discovering the high rates compared to other products, walk away and find the extra deposit to get a better rate.”
If you save a 10 percent deposit, the rates offered will improve quite dramatically.
The lowest rate available on a two-year fix is 2.13 percent at NatWest.
However, the rates for 5 percent products could fall even further.
>> Read our overview of the best mortgage rates available for first-time buyers
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