First time buyers have faced a tricky time in recent years, with the double blow of increasing rent making it harder to save a deposit and rising house prices leaving many areas unaffordable.
But there are some first time buyer mortgages that now offer a 95 percent loan to value option – meaning you could buy a home with just £5,000 in savings. But how do they work, and is it as good as it sounds?
What is Loan to Value?
A mortgage is based upon the purchase price of a house minus the deposit you have saved up to pay in cash on the day you buy. For example, if you saved £20,000 and bought a £200,000 house, your mortgage would be £180,000.
The amount your mortgage makes up to the purchase price is the loan to value percentage. In this example, the LTV is 90 percent, as you have paid 10 percent of the purchase price up front.
First Time Buyers Get 95 percent LTV.
Thanks to the Government Mortgage Guarantee Scheme, some providers are currently offering a 95 percent LTV mortgage product for first time buyers. Yorkshire Building Society is the latest to announce such a scheme, while Natwest, Lloyds, and Halifax have offered theirs for a while.
The Yorkshire Building Society scheme allows house purchases up to £500,000 – meaning you could have just £5,000 in savings and get a £495,000 mortgage. The mortgage products available as part of the Government scheme vary – for example, Natwest offers up to a purchase price of £600,000 – but some criteria remain the same across all providers.
You will also need to pass stringent credit checks and other eligibility criteria (which varies across each lender and mortgage product, so always check the small print before you apply).
These first time buyer mortgages can’t be used on new build flats (some won’t allow new build houses either), nor as part of other buying schemes like Shared Ownership or Right to Buy, and they can’t be used for Buy to Let properties.
They also must be for a first time buyer, although if a second person named on the mortgage has previously owned property that is permitted.
Family Guarantees
Halifax goes one step further, acknowledging that most first time buyers have no chance of getting on the property ladder without family help. Much like a rental tenancy agreement guarantor, Halifax’s Family Boost scheme lets family with savings assure the lender that their relative will make their mortgage repayments on time and in full every month.
A parent or grandparent can put aside ten per cent of the house purchase price in a locked savings account. If the person buying the house then makes every payment on time each month for three years, the savings are returned along with the interest accrued.
This is an ideal way for those who want to help their children or grandchildren while continuing to earn interest on their savings.
Is a £5,000 Deposit Really Enough?
High LTV mortgages for first time buyers can seem like a dream come true – especially when compared to previous schemes like Help to Buy, which seriously limited the maximum eligible purchase price.
However, there are some things to consider before you opt for a first time buyer mortgage like this.
A high LTV loan will come with a short fixed term interest rate, usually two, three, or five years. When that fixed term ends, you would usually shop around for a better mortgage deal and remortgage to secure another good rate. With high LTV mortgages, other lenders may be reluctant to take on such a risky loan, meaning buyers could be stuck with highervariable rates.
This is also a consideration for those who want to move house later down the line. A high LTV mortgage with a small deposit will make it much more difficult to remortgage to fund a house move, meaning the house you buy is one you’ll need to make sure is likely to suit you for many years to come.
Buy Now or Save for Later?
The Government Mortgage Guarantee scheme is set to end on June 30 2025, but that deadline could be brought forward. First time buyers interested in a 95 percent mortgage would be best to start looking at buying within the year, to make sure they don’t overshoot the deadline.
Some mortgage providers may also let you use your Lifetime ISA savings, which could help boost your deposit even further.
However, if you’re unsure of the area you want to live in, or think your job could change in the next few years, or you’re planning to expand your family, it could be better for you to wait and save a little longer.
Having a bigger deposit will open up other mortgage options to you – such as ones that let you buy a new build home – and reduce the overall term of a mortgage, which could save you thousands of pounds in interest in the long term.
Seek Independent Mortgage Advice
A £5,000 deposit and up to a 95 percent LTV first time buyer mortgage could be just what you need to get on the property ladder – but it’s really important to look around at all the options first.
Some brokers will try to get you to speak to their internal advisors, but spending time with an independent mortgage advisor will make sure you’re getting the best deal for your personal circumstances and future plans. An advisor might set you back a couple of hundred pounds, but save you literally thousands of pounds in the long term, so it’s always a worthwhile investment.
