Mortgage price war finally targets first-time buyers

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First-time buyers are finally starting to see some of the benefits of the mortgage price war, as experts predict rates for those with smaller deposits could drop as low as 2 per cent.

Nationwide was the latest lender to slash its 10 per cent deposit rates, cutting 0.20 per cent off its two-year fix with a £999 fee to make it 2.24 per cent.

It also has an even lower rate of 2.14 per cent on offer, but with a £1,499 fee which could make it more expensive overall depending on the size of the loan.

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The only rate lower than that is NatWest’s 2.13 per cent, also on a two-year fix, which comes with a smaller £995 fee.

Coventry Building Society and Halifax are also offering low rates of 2.15 per cent (with a £999 fee) and 2.19 per cent (with a £1,195 fee) respectively. 

According to the financial data service, Moneyfacts, the average two-year fixed rate on a 10 per cent deposit mortgage fell by 0.14 per cent between July and August this year, and the five-year fixed average by 0.13 per cent.

Buyers with 5 per cent deposits are also benefiting. Having been pulled from the market at the start of the pandemic, these loans started reappearing in spring 2021, partly due to the Government’s Mortgage Guarantee Scheme.

This is where the state offers to compensate the mortgage lender for a portion of the net losses suffered in the event of repossession, giving them more confidence to take on this higher-risk lending.

Since their reintroduction, rates have fallen by around 1 per cent and are now lower than 3 per cent in some cases.

Coventry Building Society, for example, offers a two-year fix at 2.95 per cent, with a £999 fee, for example, while Platform offers a deal at 3.09 per cent with a lower £900 fee. 

While those with larger deposits have been enjoying rate cuts for some time, first-time buyers and those with smaller savings pots are only now seeing the benefits. 

So why is this happening?

‘Lenders are getting more comfortable with the outlook for the post COVID economy, particularly the employment situation as it is now clear filling vacancies is the problem rather than redundancies,’ says Raymond Boulger, senior mortgage technical manager at broker John Charcol.

‘Plus, after the June stamp duty completion rush, there was a significant slowdown in house purchase activity.

‘Lenders have plenty of funds available, and with fewer mortgage applications they need to be more competitive to achieve their desired market share.’

First-time buyer mortgages will keep getting cheaper, as large deposit rates bottom out

Although rates are falling, they are still higher than they were before the pandemic. This is not the case for those with deposits of 75 per cent and above, as the below example from Boulger illustrates.  

Lowest mortgage rates available (with fees less than £1,000)  

February 2020  Today 
Two-year fix Two-year fix 
40% deposit: 1.17% Halifax 40% deposit: 0.87% Halifax
25% deposit: 1.25% NatWest  25% deposit: 1.03% NatWest 
15% deposit: 1.49% HSBC  15% deposit: 1.78% Halifax 
10% deposit: 1.74% HSBC  10% deposit: 2.13% NatWest 
5% deposit: 2.59% Newcastle BS  5% deposit: 2.95% Coventry BS 
Five-year fix  Five-year fix 
40% deposit: 1.44% HSBC  40% deposit: 0.99% HSBC/NatWest
25% deposit: 1.54% HSBC  25% deposit: 1.19% HSBC 
15% deposit: 1.89% Coventry BS/Platform/TSB/HSBC  15% deposit: 2.21% Platform 
10% deposit: 2.19% Platform/HSBC  10% deposit: 2.73% NatWest 
5% deposit: 2.79% Hanley Economic B S  5% deposit: 3.35% Coventry B S 

Rates at the larger-deposit end of the spectrum are thought to be close to bottoming out, with the lowest currently available sitting at 0.83 per cent. 

However, having started from a high base, 5 and 10 per cent deposit mortgages are likely to have further to fall.  

‘I think the high-deposit rates are now very close to their floor but expect further cuts in lower-deposit rates to narrow the gap between the two further, now that lenders can be more confident on the stability of the housing market,’ says Boulger.

Some even predict that they will get as low as 2 per cent, at least for buyers that can get together a 15 per cent deposit. 

Sam Harhat, head of Andrews Mortgage Services, said: ‘The gap between lower and higher deposits is still sizeable. 

‘In my opinion, we can expect a few more reductions in the lower deposit bracket – although they are not going to go sub 1 per cent.

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‘Over the next few weeks we could see mortgages with 15 per cent deposits at 2 per cent and 5 per cent deposits just below 3 per cent as lenders continue to fight it out.’ 

As well as considering the rate, buyers should also factor the arrangement fee into their calculations. For example, a borrower taking a low rate with an expensive £1,499 fee could end up paying more overall than one paying a higher rate but with  no fee. 

>> Compare rates and fees and work out if you are really getting the best deal 

Despite lenders offering better rates to those with smaller deposits, many still have stringent restrictions on the types of properties they will lend on.

Several loans are not available to those buying new-build properties or flats, for example, as banks deem these more risky investments.  

‘Many first-time buyers have been put off by high rates and limited product options, particularly when it comes to new builds,’ says Mark Harris, chief executive of mortgage broker SPF Private Clients. 

‘While the lending situation is improving, this is mainly for older properties. Outside of Government schemes, there is still a hesitation to cater to 85 or 90 per cent plus on new-build properties, particularly flats.’

Should first-time buyers wait for rates to fall? 

Although it will always depend on their own circumstances, first-time buyers with the ability to wait a while before making their purchases may benefit from doing so. 

Not only are house prices beginning to fall now the stamp duty holiday has ended, (first-time buyers do not pay on the portion of their house purchase under £300,000 regardless), but if rates continue to come down, they could also save on their monthly mortgage repayments. 

For example, a first-time buyer taking out a £200,000 mortgage on a 30-year term at the best current 5 per cent deposit, 2 year fixed rate of 2.95 per cent would pay £838 per month, while if the rate fell to 2.5 per cent they would pay £790. 

However, Harhat issued a warning that, with the number of properties on the market severely restricted following the buying frenzy of the past year, buyers holding off risked missing out on their dream home.  

‘With property stock at such low levels, first time buyers will not want to hang around too long for better deals to come along,’ he said. 

“My advice to serious buyers would be, rather than holding on for a small rate drop, is to get yourself financially ready and in a position to move quickly.

“You could miss out on that perfect property if you wait for rates to move.’