Buy a property with a 5% deposit

It's been just over four years since the credit crunch froze credit markets and sent share prices and property values plunging in the UK, US and other major economies.

Most financial pundits put the exact date when financial markets started seizing up at 9 August 2007. Since then, the UK has suffered from what's been called a 'mortgage famine'.

Tough times for home-buyers

As the credit crunch took hold, banks stopped lending recklessly (remember Northern Rock's 125% Together mortgage?) and started tightening their lending criteria. As a result, mortgages have become increasingly hard to come by -- particularly for first-time buyers and those with low deposits.

As lenders cherry-pick the safest borrowers, a large group of potential home-buyers has been left behind. The main reason for this is that they are unable to raise the 25% to 40% deposits needed to bag the lowest mortgage rates.

[SPOTLIGHT]What's more, with house prices having fallen since 2007, lenders are no longer willing to lend the full purchase price of a property. As a result, 100% mortgages are almost a thing of the past, forcing potential buyers to save long and hard to build up suitable deposits.

Of course, without a substantial deposit, first-time buyers and home-movers with little equity in their homes (the difference between a property's value and the mortgage secured on it) face two choices. First, they can continue to save, while hoping that property prices don't take off again. Second, they can look into high loan-to-value mortgages, but rates for these loans can be sky-high.

A best buy mortgage for buyers with small deposits

Although things are undoubtedly still tough for first-time buyers, the mortgage market is easing up in 2011. In particular, more and more 95% loan-to-value mortgages are being launched, which allow buyers with only a 5% deposit to climb onto the property ladder.

One fixed-rate, 95% home loan has caught my eye, because it's getting mortgage brokers excited. Here it is:

* LTV = loan to value

As you can see, this loan charges a fixed rate of 5.99% a year until the end of July 2013, after which it charges the Bank of England's base rate plus 4.45% a year. Compared to other 95% loans, this rate really stands out.

The maximum loan is £250,000 which, at 95% LTV, works out at a purchase price of no more than £263,158. This should be more than enough for almost all first-time buyers -- outside of London, that is!

Where's the competition?

To be honest, I've struggled to find a comparable mortgage which doesn't come with various strings attached. As I've said, when it comes to 95% mortgages, lending is very restricted, but here are five such loans:

As you can see, these three building societies and one bank will lend up to 95% of a property's value to first-time buyers. However, Cambridge BS and Nottingham BS will lend only in their local area, where their experience allows them to avoid lending against over-priced properties.

Also, these lenders won't lend against certain types of properties, such as freehold flats, flats above shops and, in some cases, new-build properties. Similarly, you have no chance of qualifying for one of these 95% loans unless you have a secure income and a perfect credit history.

In short, getting a 95% mortgage is far from easy!

Buying with a 5% deposit

Clearly, when buying a home with only a 5% deposit, it's really quite difficult to get a mortgage with a competitive rate. For me, the Skipton BS 5.99% fixed-rate deal looks to be the best on the market right now. However, it's far, far more expensive than 95% mortgages were before financial markets peaked in mid-2007.

Finally, it's worth asking whether first-time buyers should stretch themselves so much in order to buy a home right now. In my view, property prices are far too high and should have further to fall, especially if the economy continues to limp along. Indeed, a 5% deposit could easily be wiped out by future falls of 5% or more in property prices.

Hence, my view is that first-time buyers should sit tight, keep saving and await developments. If property prices fall and they keep saving, then a 5% deposit could become a 10%+ deposit in time!