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Mortgage brokers have welcomed an “innovative” home loan aimed at first-time buyers, which requires a deposit of just £5,000 for homes worth up to £500,000.
The mortgage, launched this week by Accord, an arm of Yorkshire Building Society, is pitched at those looking to buy a first home but struggling to save a deposit.
The £5,000 deposit mortgage is a five-year fix at an interest rate of 5.99 per cent — more expensive than the average five-year products which are typically just above 5 per cent.
Andrew Montlake, managing director at mortgage broker Coreco, commended the launch of the “innovative” scheme. “In offering a mortgage with a deposit of £5,000, this will open the doors to more buyers who had been starting to give up hope of owning in the near future,” he said.
The average deposit put down by first-time buyers in 2023 was £66,029, according to data from Halifax, equivalent to 24 per cent of the home value. The average first-time buyer property was valued at £270,602.
For those renting, saving to buy has become a bigger challenge as rents have risen sharply in recent years. UK rents rose by a record 9 per cent last month, according to the Office for National Statistics. Demand for rented homes remains strong, while landlords face higher mortgage bills as interest rates have risen.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the Accord loan was to be welcomed at a time of soaring rents.
“Ideally, there would be no need for borrowers to take on high levels of borrowing,” he said. “However, not everyone has access to the Bank of Mum and Dad, and is it fair that if you are not in this position you can never realistically afford to get on the housing ladder, but must rent indefinitely?”
Borrowers will still have to pass affordability tests to show they can make the monthly payments even if interest rates were to rise in future. For the Accord deal, the so-called “stress” rate used to test clients’ ability to pay is 8 per cent.
Other lenders have launched first-time buyer products in recent years. Skipton’s Track Record mortgage allows borrowers to use evidence of paying regular rent when judging whether they can afford the mortgage. It caps their repayments at no more than the average monthly rent the buyer has paid for the past six months.
Perenna, a relative newcomer on the market, offers mortgages at up to 95 per cent loan-to-value on an interest rate fixed for up to 40 years. Not restricted to first-time buyers, the length of the fix means buyers can borrow up to six times their income.
Accord has waived product or arrangement fees on its new deal. The loan is not available on an interest-only basis and no flats or new builds will qualify.
Banks charge more for high loan-to-value mortgages, given the higher risk to the lender should the property fall into negative equity. But Chris Sykes, consultant at broker Private Finance, said the minimum five-year fix would allow borrowers time to work through any short-term fluctuations in property prices and for the mortgage balance to fall along with their monthly payments.
“This is likely to increase the possibility that the mortgage is at a lower loan-to-value and can be refinanced at the end of the five-year period, thus mitigating the risk of negative equity,” he said.
The term of the loan is flexible: it can be repaid over a maximum of 40 years, as long as the borrower repays it before the age of 70. Longer term lengths reduce monthly mortgage payments, but the borrower will pay more interest in total over the course of the loan.
