Low deposit mortgage market stirs back to life

‘The scheme has given confidence to the market to return to 95pc lending’

When Rishi Sunak, the Chancellor, used the Budget to announce plans for a mortgage guarantee scheme, it was hailed as a lifeline for first-time buyers. Hopeful homeowners thought it would kick the market for low deposit mortgages back into life after it disappeared during the pandemic.

Some of the biggest banks have signed up to the scheme, which from April will offer 5pc deposit mortgages, using government- guaranteed loans, until the end of 2022.

However, a handful of smaller lenders have launched their own 5pc deposit mortgages without the support of the Government’s guarantee scheme – and before it kicks in.

Yorkshire Building Society was the first to relaunch 5pc deposit mortgages via its Accord Mortgages brand, at an interest rate of 3.99pc for first-time buyers. Since then Bank of Ireland and Skipton Building Society have both said they will return to the 95pc mortgage market, offering five-year fixed deals at 4.05pc and 4.17pc respectively.

Borrowers are likely to pay a premium for the new deals, as they are seen as being more risky to lend to. Those wanting one of these mortgages could benefit from waiting until more lenders join the market, so that increased competition leads to lower rates.

Jeremy Duncombe of Yorkshire Building Society said: “What the government scheme has done is given confidence to us that other lenders will follow suit, and confidence to the market to return to 95pc lending.”

Fall in 95pc mortgages in the year to January 2021, according to Moneyfacts

Lenders that take part in the guaranteed scheme must pay the Government a commercial fee for each mortgage, explaining why so many are now offering them outside the programme.

Alex Beavis, of Skipton Building Society, said: “More lenders means customers have more choice, a wider chance of being accepted for a mortgage, and a broader range of products to suit individual needs.

“In this respect, the mortgage guarantee scheme has already been a success, even before the first mortgage has been written through the scheme.”

But lending in this area comes with strict affordability requirements, a likely regular feature in the 95pc market for the foreseeable future.

Chris Sykes, of mortgage broker Private Finance, said the Government’s scheme had restored faith in lenders that it would look after the smaller deposit market. “A lot more lenders will be coming back to the 95pc market soon,” he said.

Mr Sykes said borrowers might benefit from waiting until more lenders come to market for better rates.

He said: “The rates being charged at the moment are definitely high… because of the risk at lending at 95pc.

“But competition drives rates, so from a pricing standpoint if borrowers can wait a little while until more lenders are in the market it would be the intelligent thing to do.” Rachel Mortimer