The costs of mortgages for those with small deposits have risen by almost £1,500 in a year, triggering concerns that first-time buyers are locking themselves in to pricey deals.
First-time buyers’ rates have risen steeply in the past year and they are also stretching themselves with bigger than ever deposits, new data shows.
Borrowers are now required to save an extra £11,000 towards their first home compared with the same time last year, according to Halifax, as lenders require first-time buyers to stump up bigger deposits in proportion to their home loan.
In March 2021 the average deposit was £58,986, or 23 per cent of the typical price of a first home, compared with £47,309 a year ago when the average deposit was 20 per cent.
At the same time average mortgage costs for a borrower with a 5 per cent deposit have gone up by £124 a month, or £1,488 a year, based on the £237,628 average first home.
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Banks have become more cautious of offering highly leveraged loans to first-time buyers, demanding bigger deposits from self-employed borrowers in particular.
The big lenders — HSBC, Barclays, Lloyds Bank and Santander — are yet to bring in 95 per cent mortgages after signing up to the government’s new mortgage-guarantee scheme announced in the budget. The mortgages will be backed by the Treasury, reducing losses for lenders should the borrower be unable to repay.
In the meantime smaller banks and building societies have trickled back in to the 5 per cent deposit market but with significantly higher rates than before the pandemic.
There are just 34 mortgages for borrowers with a 5 per cent deposit, according to Moneyfacts, compared with 162 at the same time last year, while borrowers with deposits of 15 per cent or more have their pick of more than 600 deals.
The average two-year fixed-rate mortgage with a 5 per cent deposit costs 4.47 per cent, up from 3.47 per cent a year ago, while the rates on less risky mortgages have fallen. This means the monthly repayment on £150,000 is £831 compared with £749.
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A two-year fixed-rate deal for a borrower with 40 per cent equity or deposit costs 1.63 per cent, down from 1.82 per cent a year ago.
“It’s a take-it-or-leave-it situation for many first-time buyers,” says Aaron Strutt, the product director at the mortgage broker Trinity Financial. “Borrowers have to think twice before locking themselves into costly mortgages, especially if they come with high early repayment charges.”
The stamp duty holiday, which has been extended to July, has led to yo-yos in property prices that have made it difficult for first-time buyers to get on the ladder.
Demand for homes is outstripping supply, according to a Royal Institution of Chartered Surveyors market report published on April 8, which also found that new-buyer inquiries were at their highest level since September.
First-time buyers have been less likely than movers to benefit from Rishi Sunak’s stamp duty holiday since it was introduced in July last year, as under normal rules they would be able to get the first £300,000 of a property tax free as long as it is worth less than £500,000.
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The proportion of homes bought by first-time buyers has fallen in 2021, according to research by Hamptons International. So far this year 25 per cent of first-time buyers, as a proportion of all home buyers, purchased homes in England, Scotland and Wales, down from 28 per cent in 2020.
Aneisha Beveridge, the head of research at Hamptons, said: “This was partly driven by the fact that younger workers were most at risk of unemployment or income cuts during the economic crisis.”
She adds: “The new mortgage guarantee scheme, announced in the budget and starting this month, is likely to further boost first-time buyer numbers over the year ahead. We believe this has the capacity to support almost 100,000 purchases, boosting transactions.”
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