First-time buyers are facing a fresh squeeze as the average rate for those with just a 5% deposit has risen.
The rise leaves many people trying to get on the housing ladder paying hundreds of pounds more each year simply because they cannot save a bigger deposit. New analysis from Moneyfactscompare.co.uk shows the average five-year fixed mortgage for borrowers with a 5% deposit has risen to 6.07%, piling further pressure on households already struggling with higher living costs. The figures come as major lenders including HSBC, Santander and Lloyds Bank have pushed up mortgage rates in recent days as wholesale borrowing costs remain elevated.
For a typical first-time buyer borrowing £250,000 over 25 years, having only a 5% deposit instead of 10% now costs almost £600 a year extra in mortgage repayments. The wider mortgage market is also becoming more expensive.
The Moneyfacts Average New Mortgage Rate has risen to 5.59%, up from 5.47% at the start of July and well above the 4.90% seen in March, suggesting hopes of steadily falling mortgage costs have been dashed.
Experts warn borrowers could face another hit if the Bank of England is forced to increase interest rates later this year in response to stubborn inflation and rising living costs.
According to Moneyfacts, a 0.25 percentage point rise in Bank Rate would add around £450 a year to repayments on a typical £250,000 mortgage, while a 0.5 point increase would cost borrowers about £900 more annually. Those left languishing on a lender’s standard variable rate face an even bigger penalty.
The average SVR currently stands at 7.13%, meaning someone with a £250,000 repayment mortgage pays around £1,787 a month, compared with about £1,559 on the average five-year fixed deal – a saving of roughly £2,736 a year by switching.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Interest rates are expected to stay higher for longer and those who delay locking into a fixed rate mortgage could pay the price.
“Despite fixed rates rising in recent weeks due to swap rate volatility, it is still worth moving off an expensive revert rate to a fixed deal, as borrowers could save around £2,800 a year.”
She warned that borrowers taking tracker mortgages could also be caught out if the Bank of England raises rates because their repayments would increase immediately. The Bank of England will meet next week, but is expected to hold interest rates again.
Ms Springall added: “This will also worry new buyers who have a small deposit, as the average five-year fixed mortgage rate at 95% loan-to-value recently rose above 6%, now at 6.07%.
“First-time buyers who can save a 10% deposit will not only have more purchasing power, but they will also widen the choice of cheaper mortgage rates. Those who borrow £250,000 over 25 years will pay £600 less on their mortgage per year compared to the average rate available to borrowers with a 5% deposit.”
However, she acknowledged many aspiring homeowners simply cannot build even a modest deposit because of high house prices.
Lenders have attempted to help by launching products requiring only tiny deposits, including 98% loan-to-value mortgages and some deals needing just £5,000 upfront, although these often come with restrictions and higher borrowing costs.
Average mortgage rates
Mortgage – July 2021 – July 2026
Standard variable rate – 4.41% – 7.13%
Two-year fixed – 2.55% – 5.62%
Five-year fixed – 2.78% – 5.66%
Source: Moneyfactscompare.co.uk
The latest figures underline how quickly borrowing costs have risen over the past five years, with average five-year fixed mortgage rates now more than double their 2021 level.
For many first-time buyers, the biggest hurdle is no longer just saving a deposit – but finding a mortgage they can still afford once they have done so.