5% deposit mortgages fall to lowest rate on record

The interest rates on mortgage deals aimed at first-time buyers with just a 5% deposit have fallen to their lowest level since records began in 2011, research from the Moneyfacts UK Mortgage Trends Treasury Report reveals.

The research shows that the average rate on a two year fixed mortgage deal requiring a 5% deposit now stands at 3.09% and the average rate on an equivalent five year fixed deal at 3.39%. Both rates have seen significant falls compared to a year ago, with the average two year fixed deal needing a 5% deposit decreasing by 1.35% in the 12 month period and the average five year deal falling by 0.58%.

While average rates on deals needing a 5% deposit have been falling, rates on deals aimed at those with a larger deposit or who own a substantial amount of equity in their property, have risen in recent months.

This has resulted in average rates across the mortgage market as a whole increasing. For example, the average rate on a two year fixed deal now stands at 2.34%, which compares to a month ago when it was 2.29%. Meanwhile, the average five year fixed rate is 2.64%, an increase from a month ago when it stood at 2.59%.

Mortgage rates across the market are, however, lower than they were a year ago. In December 2020 the average two year fixed deal stood at 2.49% and the average five year fixed deal at 2.69%.

Eleanor Williams, finance expert at Moneyfactscompare.co.uk, says a reason why rates on mortgage deals aimed at first-time buyers are falling could be due to lenders looking to attract these buyers onto their mortgage books.

She said: “It may be that, following the end of the Stamp Duty holiday which had kept the property market buoyant for much of 2021, providers are now focusing on enticing first-time buyer business, which has often been considered the life blood of the housing market. Indeed, those looking to secure a mortgage with a 5% deposit may be very pleased to note that at 3.09% and 3.39%, the average fixed rates on offer have plummeted to the lowest on our records (which go back to 2011). Due to rising house prices, mortgage affordability concerns and until recently limited product choice and higher rates, taking that first step onto the property ladder may have felt a distant possibility for many, so these positive figures may provide some hope to those who dream of owning their own home.”

Although many first-time buyers will welcome falling mortgage rates on deals requiring a 5% deposit, purchasing a property with such a small deposit remains risky.

A major risk for potential homeowners considering this option is that if house prices fall they could find that they owe more on their property than it is worth – which is termed negative equity. Being in negative equity can make it difficult for homeowners to sell their property and could potentially make it difficult for them to remortgage, which can result in homeowners being stuck on deals at uncompetitive interest rates.

Another risk to homeowners looking to purchase a property with a 5% deposit is that if the Bank of England increases base rate, which many experts predict will happen early next year, this could see mortgage rates increase. Although locking into a fixed mortgage deal will protect homeowners from initial mortgage rate rises, when they look to remortgage at the end of their fixed rate deal, higher rates could make their monthly repayments unaffordable.

For many first-time buyers buying a property with a 5% deposit may be their only way of getting onto the housing ladder, but those considering this option should think carefully if it is the right decision or whether waiting and saving for a larger deposit may be a better option.