Availability of 5% deposit mortgages hits two-year high... but rates are still edging up
- With base rate cuts expected later this year, experts think we are at turning point
- How to get a mortgage as a first-time buyer: What you need to know
The number of mortgages available to people buying with a 5 per cent deposit has reached the highest point in over two years, according to rates scrutineer Moneyfacts.
In a boost to first-time buyers, there are now 361 mortgage deals covering 95 per cent of a property's value, which is the highest recorded since May 2022.
Lenders sometimes withdraw their lowest-deposit mortgages from the market at times of economic uncertainty, as they view them as more risky.
For example, at the start of the pandemic in summer 2020 the number of 5 per cent mortgage deals dropped to almost zero. Some 5 per cent deals were also withdrawn following the mini-Budget in 2022.
The rise in deals available could therefore reflect more positive sentiment surrounding the housing market.
More mortgages: The availability of 5% deposit home loans has risen to its highest point in over two years, according to Moneyfacts
Rachel Springall, finance expert at Moneyfacts, said: 'Borrowers who have a limited deposit may be pleased to see a rise in the number of mortgages available at 95 per cent loan-to-value this month, reaching a two-year high.
'There is lots of room for growth in this area of the market, as it currently represents just 5 per cent of all deals available to borrowers across fixed and variable mortgages.'
However, while the number of mortgage products available to buyers with smaller deposits appears to be increasing, average mortgage rates are rising.
That is despite recent cuts in mortgage rates by Barclays, HSBC and others.
What is the average 5% mortgage rate?
The average two-year fixed rate for someone buying with a 5 per cent deposit is 6.26 per cent, up from 6.2 per cent last month, according to Moneyfacts.
This means that the average home buyer with a 5 per cent deposit, requiring a £200,000 mortgage on a 25-year term, will pay £1,313 per month.
Five-year fixes are offering a cheaper alternative, however. The average five-year deal is 5.78 per cent, according to Moneyfacts, up from 5.73 per cent last month.
For the same buyer, that would mean paying £ 1,262 per month.
Mortgage rates for buyers with smaller deposits tend to be higher.
For buyers with at least a 40 per cent deposit the average two-year fix is 5.45 per cent and the average five-year fix is 5.06 per cent. These rates are unchanged from last month.
But most buyers should be able to do much better than average if they speak to a mortgage broker who can explore the whole of the market.
The lowest two-year fix for someone buying with a 40 per cent deposit or more is 4.63 per cent while the lowest five-year fix is 4.2 per cent.
The same is true for those buying with just a 5 per cent deposit.
The lowest two-year fix charges 5.55 per cent, while the lowest five-year fix is 5.2 per cent - though both come with arrangement fees which need to be factored in.
> Check out the best mortgage rates here
Are mortgage rates about to turn?
The downward trend has occurred due to shifting expectations around the future of interest rates. Market interest rate expectations are reflected in swap rates.
These swaps are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.
As of 4 July, two-year swaps are at 4.45 per cent and five-year swaps are at 3.95 per cent.
Price war: Barclays, HSBC and Yorkshire Building Society have all reduced their rates, following Santander and Halifax
This is down from a month ago when two-year swaps were at 4.61 per cent and five year swaps were at 4.05 per cent.
'Lenders have been repricing their deals in response to volatile swap rates, which calmed during June,' added Springall.
'If swap rates reach a turning point to drop then there will be an expectation for fixed mortgage rates to come down, but it may be a slow and steady process to have a huge impact on overall average rates.'
Markets are expecting two base rate cuts this year, with further cuts predicted for next year.
Nicholas Mendes, mortgage technical manager at broker John Charcol thinks that base rate cuts combined with a more optimistic outlook for the UK economy could start to see mortgage rates fall further.
'The expected cuts in the Bank of England's bank rate are already reflected in current fixed-rate mortgage pricing,' said Mendes.
'However, as the bank rate decreases, the market is likely to gain more confidence in the prospect of further reductions, potentially leading to additional cuts in fixed mortgage rates by around 0.5 per cent this year.'
Mendes thinks we could see five-year fixes potentially falling to 3.75 per cent and two-year fixes to 4 per cent by the end of 2024.
'This decline is driven by anticipated bank rate cuts and growing market confidence in continued rate reductions.
'It would provide significant financial relief for homeowners, encourage more first-time buyers to enter the market, and generally boost housing market activity, contributing positively to the broader economy.'
> Read our guide: How to get a mortgage as a first-time buyer
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