Saving for a mortgage deposit? Why 10% is the magic number, as 5% mortgages decline by a third in a year
By Marc Shoffman
There has been plenty of talk of the return of small deposit mortgages, but borrowers will be missing out on hundreds of products by sticking to a 5 per cent deposit when shopping around for a homeloan, research for This is Money has revealed.
Despite talk of their resurgence and the cheap cash given to banks and building societies by the Funding for Lending, 5 per cent deposit mortgages on offer are down almost a third over the past year and many will require you to take part in the Help to Buy deposit-boosting scheme.
Figures show that there are almost 10 times more mortgage products available to borrowers who can push from a 5 to a 10 per cent deposit.
Size matters: Pushing a mortgage deposit up from 5 to 10 per cent gives a wider choice of products
The Funding for Lending Scheme has helped open up the mortgage market and compelled lenders to cut rates to attract business, but the data shows that competition for your deposit really starts at 10 per cent.
While this reflects the rule of thumb that the more you save, the better the rate you can get, it also illustrates the difference pushing your deposit from 5 to just 10 per cent can make.
Figures compiled by Moneyfacts for This is Money show that there were 45 mortgage products being advertised for a 5 per cent deposit in July 2013. This is down from 62 in July 2012, a 27 per cent drop in availability.
In contrast, in the past year the number of products with a 10 per cent deposit have increased from 264 to 396 - a 50 per cent increase.
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What's on offer for 5% deposit borrowers
If you do go for a 5 per cent mortgage, the type of products are pretty limited.
Of the top five lenders in the UK, Only Nationwide does a standard 95 per cent loan-to-value mortgage, but you need to save with it for six months.
Lloyds and Barclays' Woolwich offer a 95 per cent loan-to-value mortgages under schemes where a family member puts 20 per cent in savings, while Santander has three shared ownership mortgages.
It may be worth consulting your local building society, as mutuals such as Leeds, Teachers, Newbury and Hanley Economic all have standalone 95 per cent loan-to-value deals.
However, your main choice of mortgages if you only have a 5 per cent deposit are the government's NewBuy or Help to Buy schemes
This shows that it may be worth saving for a bit longer if you can push your 5 per cent bag of money to a 10 per cent deposit as there is much more choice.
Ultimately more competition will mean rates are lower so that lenders can attract your money.
Lending data also shows that there were more approvals on mortgage deposits over 10 per cent last year.
Data from esurv chartered surveyors showed there were 51,251 approvals in 2012 at 85 to 90 per cent loan to value compared with 13,187 at above 90 per cent loan to value.
Deposit takers: The choice of mortgages starts at 10 per cent deposits and is best if you have 25 per cent saved
Big deposits are still king
Mortgage rates are best if you can raise a 40 per cent deposit, but choice is biggest at the 25 per cent deposit level.
Figures from Moneysupermarket show the number of mortgages you could get with a 40 per cent deposits have increased from 319 in July 2012, to 524 this month.
Those with a 25 per cent deposit have a choice of around 735 products, according to Moneysupermarket. There are also 447 products on offer at a loan to value of 80 per cent.
So where can you find the best deals? We reveal some best buys below.
5 per cent deposit
Woolwich offers a three-year fixed rate at 3.49 per cent for which you would only need a 5 per cent deposit, if you use the government-backed Help to Buy scheme.
The Help to Buy scheme provides an extra 20 per cent equity, giving you a 25 per cent mortgage. It has no arrangement fee.
The rate reverts to a Barclays tracker that follows the base rate plus 3.39 per cent, currently 3.89 per cent.
Natwest offers a five-year fixed rate mortgage at 3.59 per cent using Help to Buy and you would only need a five per cent deposit. The rate reverts to 4 per cent at the end of the deal.
If you want to take advantage of government housing schemes, it may be worth waiting for the second part of the plans to help people buy.
The government is offering an indemnity scheme from January 2014, that will guarantee up to 15 per cent of your loan for lenders. You will still need a 5 per cent deposit.
Find out more about government housing schemes including Help to Buy
Helping hand mortgages
If your parents, or a family member, are willing to help with some cash towards a deposit, Woolwich has a Family Springboard Mortgage that requires a 5 per cent deposit.
The homebuyer takes out a Family Springboard Mortgage, while their helper opens a Helpful Start Account linked to that mortgage. The helper then puts 10 per cent of the purchase price into the Helpful Start Account, while the buyer provides a 5 per cent deposit.
After three years, the helper gets their money back with interest, currently 2 per cent a year, provided that repayments are kept up to date on the mortgage. The rate is 3.99 per cent with a £499 fee. The rate reverts to 4.49 per cent at the end of the deal.
Lloyds Banking Group has a similar three-year deal under its Lend a Hand mortgage. The buyer will need a 5 per cent cash deposit, and the helper will have to put up to 20 per cent in savings as security. The total must equal a 25 per cent deposit.The helper will earn a fixed interest rate of 2.7 per cent.
These types of deals could be more beneficial for a parent rather than simply providing funds for a deposit as the money will be earning interest.
Standard 5 per cent deposit mortgages
The top deals with a 5 per cent deposit come from the building societies. Hanley Economic offers a two-year fix at 5.59 per cent with a £1,000 fee.
Alternatively, Yorkshire Bank offers a first time buyer deal at 5.49 per cent, it has no fee.
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10 per cent deposit
Furness Building Society has a three-year fixed rate at 3.45 per cent. It comes with a fee of £995 and only requires a 10 per cent deposit. The rate reverts to its standard variable rate of 5.44 per cent at the end of the deal.
First Direct has a five-year fix for those with a 10 per cent deposit at 4.19 per cent with a £1,499 fee. It reverts to 3.7 per cent.
Nationwide has a two-year tracker mortgage with a rate of 3.39 per cent. You will need a 15 per cent deposit and a fee of £499. It reverts to their standard rate of 3.99 per cent at the end of the deal.
The Post Office has a two-year fixed rate at 3.49 per cent There is no arrangement fee and the rate reverts to the Bank of England Base Rate, plus 3.99 per cent for the rest of the term.
The Post Office has a two year rate for 2.74 per cent with a £1,190 fee, or 3.19 per cent without a fee.
HSBC has a lifetime tracker that follows the Bank of England base rate plus 2.49.
Post Office Mortgages is offering a two-year fixed rate at 2.19 per cent, or three-year fixed rate at 2.38 per cent. Both have a £995 fee and a lending fee of £195 which can be deferred until the mortgage is fully repaid.
Leeds Building Society has a rate of 2.45 per cent for two years and has a low fee of £199. However, this is only available through brokers.
Chelsea Building Society has a best buy two-year fixed rate mortgage at 1.64 per cent. It is available up to 65 per cent loan to value and has total fees of £1,545. The rate moves to 5.79 per cent at the end of the two year term and is available online, on the phone and in-branch to first time buyers, homemovers and for remortgaging.
Norwich and Peterborough has a rate of 1.99 per cent and the five-year fixed rate mortgage has been reduced from 2.74 per cent to 2.59 per cent. Each mortgage is available for loans up to 65 per cent loan to value and has a fee of £295, you also need to pay an application fee of £90 taking total fees to £385.
Santander has also launched a two-year fix with a rate of 1.99 per cent, available to its 123 current account customers. It has a £995 fee and free cashback or legals.
HSBC has a rate of 1.68 per cent for two years and a £1,999 fee.
Tesco Bank offers 2.49 per cent for five years with a £1,495 fee.
Saving for a mortgage deposit? Why 10% is the magic number
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