Would-be homeowners are being offered a new route on to the property ladder with banks and building societies launching a wave of mortgages requiring little – or even no – deposit.
The latest move comes from Leeds Building Society, which has unveiled a new mortgage allowing first-time buyers to purchase a home with a deposit of just 2% – as little as £5,000 on a £250,000 property. The launch comes as lenders battle for business despite signs that the first-time buyer market is losing momentum.
New figures show mortgage applications from first-time buyers fell by 9.1% in the second quarter compared with a year earlier, as economic uncertainty and concerns over interest rates prompted many would-be buyers to delay moving.
Applications dropped from 131,682 to 119,749 between April and June, while activity in the first half of the year was down 4.3%, according to figures compiled by the Yorkshire Building Society.
The growing number of low-deposit deals suggests lenders are trying to tempt cautious buyers back into the market by reducing one of the biggest barriers to home ownership.
Leeds Building Society’s new Start Mortgage offers loans of up to five times a borrower’s income with a fixed rate of 5.65% over five years. Borrowers need a minimum income of £30,000 and can buy homes worth up to £500,000. Self-employed applicants are eligible, while gifted deposits from family members are also accepted.
Matt Bartle, director of mortgages at Leeds Building Society, said: “Saving for a deposit remains one of the biggest hurdles for first-time buyers. By reducing that barrier to just 2% and combining it with flexible lending criteria, we’re helping more people move closer to owning their own home.”
Rachel Springall, finance expert at Moneyfacts, said: “The Start Mortgage is a rare 98% loan-to-value deal and as applicants can borrow up to five times their income, this launch could make a meaningful difference for would-be homeowners who might otherwise remain stuck in the rental cycle.”
The deal joins a growing list of products designed for buyers struggling to save large deposits. Lloyds recently launched a mortgage requiring a minimum deposit of £5,000 for homes worth up to £300,000, while Santander offers a similar 98% loan-to-value product for properties worth up to £500,000.
Metro Bank has gone even further by launching a 100% mortgage for eligible buyers using a joint borrower, sole proprietor structure, allowing family members to support an application without becoming joint owners of the property.
Skipton Building Society also offers a 100% mortgage aimed at renters, while Yorkshire Building Society provides a 99% loan-to-value mortgage with just a £5,000 deposit.
David Hollingworth of mortgage broker L&C Mortgages warned buyers should remember that borrowing more usually means paying a higher interest rate.
Those putting down a 5% deposit can currently find standard fixed-rate mortgages from around 5%, while borrowers with deposits of 10% or more generally have access to cheaper rates and a much wider choice of deals.
The renewed competition comes as mortgage pricing begins to ease after volatility earlier this year. Moneyfacts data shows average two-year and five-year fixed mortgage rates both fell to 5.52% in June following the sharp increases seen during the market turmoil linked to tensions in the Middle East.
Mortgage experts also warned buyers not to focus solely on getting through the front door.
Mortgage app Sprive estimates that someone borrowing £245,000 could save more than £30,000 in interest and become mortgage-free three years earlier by overpaying their mortgage by £100 a month from the outset. Even an extra £30 a month could save more than £10,000 over the life of the loan.