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Buy a home with a 5% deposit!

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This new mortgage may be the answer for those borrowers with only a small deposit.


As I can happily attest to, it’s not easy to get a mortgage if you have a fairly modest deposit. I bought my home last year with just a 10% deposit, and there wasn’t exactly a wide range of options at my disposal.

However, thanks to Lloyds TSB, a brilliant mortgage that it designed to help first-time buyers access the market with just a 5% deposit has now been extended to help all borrowers.

Lending a Hand

Last year, Lloyds unveiled its Lend a Hand mortgage, a deal which would allow borrowers to purchase their first home with a deposit of just 5%, on a three year-fixed rate, at that time priced at 4.39%.

However, perhaps inevitably, there is something of a catch – the first-time buyer’s parents would need to be involved, and have a hell of a lot of savings.

In order to access the mortgage, the parents of the first-time buyer would need to place a sum equivalent to 20% of the purchase price into a Lloyds savings account. They’d still retain ownership of their savings, and would benefit from a pretty competitive 3.5% interest on their savings.

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By the end of the three years, so long as the outstanding loan was then equivalent to 90% of the value of the home (so either you had paid off 5% of the mortgage, or the property had risen sufficiently in value) then the mortgage would be run independently, and the requirement for the parents to keep their savings with Lloyds would end.

In essence, it’s not a million miles away from how an offset mortgage works.

Opening it up

However, now the mortgage has been opened up to all borrowers with a 5% deposit, not just first-time buyers.

So long as you have a parent, grandparent or any other family member who is happy to invest 20% of the property value in the Lloyds Lend a Hand savings account, which pays 3.75%, then you can apply for the Lend a Hand mortgage, which will charge 4.79% over three years on a fixed basis.

John Fitzsimons explains why the best mortgages offer you a bit of flexibility

There will also be a fee of £895.

It’s far from perfect – how many of us can call on families with that sort of money stashed away in savings that they won’t need for three years? However, there will be some borrowers for whom this mortgage is perfect, while it at least shows a bit of innovation on the part of Lloyds.

Buying a Bovis home

Lloyds’ move is just the latest in a series of product launches by lenders aimed at helping those borrowers with smaller deposits. Last month Barclays announced it had teamed up with Bovis Homes to help borrowers with just 10% deposits buy new-build properties from the housebuilder, thanks to its Perfect 10 mortgage.

This is potentially quite significant as up to now it has been exceptionally difficult to get a high loan-to-value on a new-build property. What's more, the Barclays deal is pretty attractive – fixed at 4.99% for two years, with a fee £999, and after those two years it reverts to a lifetime tracker at base rate plus 2.49%.

Hopefully, other lenders will now follow suit.

Now is the time to act

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Sadly there is still not exactly a huge number of mortgages for borrowers to access if they only have a small deposit, though there are still some pretty attractive looking deals which I’ve detailed in the tables below.

However, if you are considering borrowing at a high loan-to-value, you may need to get a move on. The FSA has unveiled plans for new requirements on lenders to ensure responsible lending, and that borrowers do not take on more than they can handle. While this is obviously a worthy aim, many figures within the mortgage industry have warned that such plans go too far and would actually prevent responsible borrowers on low incomes from accessing the market.

The regulator is consulting on its plans in November, so if you want to make your move this year, hurry up!

10 great fixed deal for small deposits

Lender

Term

Interest rate

Maximum loan-to-value

Fee

Co-operative Bank

Two-year fixed rate

3.99%

85%

£999

Yorkshire BS

Two-year fixed rate

4.15%

85%

£1,495

Britannia

Two-year fixed rate

4.99%

90%

£499

Britannia

Three-year fixed rate

4.69%

85%

£999

Yorkshire BS

Three-year fixed

4.79%

85%

£995

Lloyds TSB

Three-year fixed

4.99%

95%

£994

Post Office

Three-year fixed rate

5.99%

90%

£999

Yorkshire BS

Five-year fixed rate

5.39%

85%

£995

Britannia

Five-year fixed rate

5.89%

90%

£499

Post Office

Five-year fixed rate

5.99%

90%

£999

10 great tracker deals for small deposits

Lender

Term

Interest rate

Maximum loan-to-value

Fee

Cheltenham & Gloucester

Two-year tracker

0.49% until December 2010 (tracks base rate -0.01%) then 5.99% until July 2012 (tracks base rate + 5.49%)

90%

£895

Yorkshire BS

Two-year tracker

3.49% (tracks base rate + 2.99%)

85%

£1,495

Yorkshire BS

Two-year tracker

3.59% (tracks base rate + 3.09%)

85%

£995

Skipton BS

Two-year tracker

3.79% (tracks base rate + 3.29%)

85%

£695

Newcastle BS

Two-year tracker

3.99% (tracks base rate + 3.49%)

90%

£694

First Direct

Lifetime tracker

3.99% (tracks base rate + 3.49%)

85%

£99

HSBC

Lifetime tracker

4.49% (tracks base rate + 3.99%)

90%

£499

Clydesdale Bank

Lifetime tracker

4.59% (tracks base rate + 4.09%)

85%

£999

Post Office

Lifetime tracker

4.59% (tracks base rate + 4.09%)

85%

£999

Hinckley & Rugby BS

Lifetime discounted mortgage

4.64% (tracks the lender’s SVR – 1%)

90%

£945

More: Good riddance to this property scam | House prices fall for third month in a row

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

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