If you’re on the hunt for low deposit mortgages, there may be more opportunities for you than you think. They may be scarce, but they can be found. Here are our recommendations when making comparisons.
Whether you are looking to climb on to the property ladder for the first time or a homeowner hoping to find a better mortgage, it makes sense to shop around for the best deal.
Lenders are more reluctant to offer 5% mortgages because there is more risk for them, as it means they have to stump up the remaining 95%.
However, don’t lose hope. Although mortgage deals are harder to come by if you have a 5% mortgage down payment, there are still some out there.
This is why when you make a comparison of what mortgages are available, you’ll see that lenders offering the best 5% deposit mortgages tend to charge more than they would for lower Loan-to-Value (LTV) deals.
Make sure you can commit financially
As tempting as it is to get your foot on the first rung of the ladder, you need to be sure you’re ready to take the plunge. Ask yourself:
Can you afford to make the repayments that your lender asks for?
- Do you have a steady income or fulltime job?
- Will your lifestyle change and where do you need to cutback and save?
- If you are in a relationship will you be looking for a joint mortgage?
Once you have looked at your finances, savings, income and spending, you’ll have a better idea of whether a mortgage with 5% deposit is something you can afford. If you think it is, then you can start to compare 5% deposit mortgages.
Help for borrowers with low deposits
For borrowers who can’t just whip out a large deposit, help is at hand. There are schemes that are designed to help give you support if you need it to get a 5 percent mortgage deposit.
Help to buy is a government-backed scheme that aims to give home buyers with a small deposit help in purchasing a property. For more information read our guides; Help to Buy Mortgage Scheme Explained or Help to Buy Mortgage Guarantee Scheme: FAQs.
Another alternative, if you have a friend or family member willing to support your application, is to ask them to act as a guarantor on your application. This may reduce the cost of your mortgage, for more details read our guide Being a Guarantor for a Mortgage: Should You Risk It?
There are good and bad aspects to these initiatives so be careful not to dive in at the deep end and check all the conditions of how they work and what they offer when looking at 5 percent deposit mortgages.
Remortgaging with a mortgage 5% deposit
If you are already a homeowner and want to reduce the amount you are making in repayments each month, you may want to consider remortgaging.
Some banks offering 5% deposit mortgages used to offer very high percentage LTV mortgages of more than 100%. While these are much less common now if you borrowed you may still only have a small amount of equity in your property. If that’s the case you may be able to move on to a 95% LTV mortgage, with cheaper repayments. Other reasons why you might want to remortgage include consolidating other debts into one monthly repayment or making money available to carry out home improvements.
Initial interest rate durations and mortgage fees
When comparing what deals are on the market, you’ll notice that the amount of the time the initial interest rate lasts for varies.
They can last from two to five years and as choice is limited when it comes to looking for 95% LTV mortgages, rates for 5% deposit mortgages will generally be fixed.
2 year fixed rates tend to be lower than their 5 year alternatives as they only fix your interest rate for a shorter period of time. Meaning that, after two years you may find that interest rates have gone up, so repayments from then might be more expensive.
With a five year fixed rate, you will know how much you are paying for the next 60 months, offering a greater degree of stability and protection against rate changes. However, if rates fall during those 60 months you could be stuck paying over the odds.
Of course it’s hard to say what’s going to happen to general interest rates, set by the Bank of England, so there are benefits and drawbacks of both shorter and longer initial rates.
Some mortgages will also come with product fees, which is when the lender charges you for picking their best deal. Some will have no fee, while others could have one of as much as £1,000, so if you’re hard-up for cash in the first place then this could be a decisive factor.
Always check carefully what conditions each low deposit mortgage has and whether they match your situation. Our 95% mortgage comparison can help you see what offers are out there and which ones are best for you.