Stay informed with free updates
Simply subscribe to myFT Digest for Real Estate – delivered straight to your inbox.
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 aimed at those looking to buy a first home but struggling to come up with a deposit.
A mortgage on a £5,000 deposit is a five-year fix with an interest rate of 5.99 per cent – which is more expensive than average five-year products which are usually just above 5 per cent.
Andrew Montlake, managing director of mortgage broker Coreco, praised the launch of the “innovative” scheme. He said: “By offering a mortgage with a deposit of £5,000, this will open doors to more buyers who are starting to give up hope of owning in the near future.”
The average deposit paid by first-time buyers in 2023 was £66,029, according to data from Halifax, equivalent to 24 per cent of the home's value. The average value of a property purchased by a first-time buyer was £270,602.
For those renters, saving to buy has become a bigger challenge as rents have risen sharply in recent years. Rents in the UK rose by a record 9 per cent last month, according to the Office for National Statistics. Demand for rental homes remains strong, while landlords face rising mortgage bills as interest rates rise.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said the agreement loan was welcome at a time of rising rents.
“Ideally, there would be no need for borrowers to have high levels of borrowing,” he added. “However, not everyone has access to the bank of mum and dad, and is it fair that if you're not in that position, you can realistically never get on the housing ladder, but have to rent indefinitely?”
Borrowers will still have to pass affordability tests to show they can make the monthly payments even if interest rates rise in the future. For an agreement deal, the so-called “stress” rate used to test customers' ability to pay is 8 percent.
Recommended
Other lenders have launched first-time buyer products in recent years. Skipton's Track Record Mortgage allows borrowers to use evidence of regular rent payments when judging whether they can afford the mortgage. It limits repayments to no more than the average monthly rent paid by the buyer over the past six months.
Perenna, a relative newcomer to the market, offers mortgages of up to 95 per cent loan-to-value at a fixed interest rate for up to 40 years. It's not just for first-time buyers, the longer fix-up period means buyers can borrow up to six times their income.
Accord has waived product or arrangement fees in its new deal. The loan is not available on an interest only basis and no apartments or new buildings will be eligible.
Banks charge more for mortgages with higher loan-to-value, due to the higher risk to the lender if the property falls into negative equity. But Chris Sykes, an adviser at brokerage Private Finance, said a five-year minimum fix would allow borrowers time to deal with any short-term fluctuations in property prices and a decline in their mortgage balance with their monthly repayments.
“This is likely to increase the likelihood that the mortgage will have a lower loan-to-value value and can be refinanced at the end of the five-year period, thus mitigating the risk of negative equity,” he said.
The loan term 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 terms result in lower monthly mortgage payments, but the borrower will pay more interest overall over the course of the loan.
