The three ways first-time buyers can buy with a small deposit as rate rises force savers to find an extra £18k

Credit: Alamy FIRST-TIME buyers are being forced to find thousands of pounds extra for a deposit as higher mortgage rates reduce what they can borrow – but many may not realise they can bag a home with little or no deposit. The average homebuyer now needs to put down an extra £18,200 to keep their monthly mortgage repayments unchanged compared with the start of the year, according to property website Zoopla. And in London, the figure almost doubles to £35,500 because buyers typically face higher house prices and larger mortgages in the capital. Zoopla said five-year fixed mortgage rates have risen from below 4% in January to around 4.8% now, reducing the amount buyers can borrow while keeping their repayments at the same level. Sign up for the First Time Buyer Guide newsletter Thank you! Someone who could previously afford a £200,000 mortgage can now only borrow around £182,000 – a fall of 9%. This squeeze is particularly tough on first-time buyers, who often need larger mortgages and have less savings to fall back on – and they don’t already have cash in another property they can sell. However, buyers struggling to build a large deposit still have several options which could help them get on the ladder sooner. Here are three ways to buy with a smaller deposit – and the catches to watch out for. Get a 5% deposit mortgage (or less) Some lenders will let first-time buyers purchase a property with a deposit of just 5%, meaning they borrow the remaining 95%. For example, on a £250,000 property, you would need to save £12,500 for a 5% deposit, rather than £25,000 for a more typical 10% deposit. Most read in Money Nationwide offers 95% LTV mortgages to both first-time buyers and home movers, with borrowing of up to £750,000, subject to affordability and eligibility checks. It offers two, three and five-year fixes, as well as a two-year tracker. HSBC also offers 95% mortgages requiring a minimum 5% deposit. Buyers can borrow up to 95% of the property value, with mortgage terms of up to 40 years. Its 95% lending is capped at £500,000 and is not available on new-build properties. There are also some deals requiring even less upfront. Lloyds launched a mortgage earlier this year requiring a minimum deposit of just £5,000, available through Lloyds and Halifax. The deal allows eligible first-time buyers to borrow up to 98% of a property’s value on homes costing up to £300,000. However, buyers should not assume that putting down the smallest possible deposit is always the cheapest option. Mortgages with a high loan-to-value ratio – meaning you borrow a larger proportion of the property’s total value – will often come with higher interest rates than deals available to people with bigger deposits. That means your monthly repayments can be higher, and you could pay significantly more interest over your mortgage’s term. You also have less protection if property prices fall. For example, someone buying with a 5% deposit could more easily fall into ‘negative equity’, which is where their mortgage is worth more than the current value of their home, if prices drop sharply. MoneyHelper warns that low- or no-deposit mortgages are likely to cost more and could increase the risk of negative equity. Get mortgage help from family Some mortgages allow you to get help from parents, relatives or even friends without them simply handing over a large cash deposit. These are often described as ‘family-assisted’, ‘guarantor’ or ‘springboard’ mortgages, although the way they work varies between lenders. Barclays‘ Family Springboard mortgage, for example, allows buyers to borrow the full purchase price without putting down their own deposit. Instead, a family member or friend puts 10% of the property’s value into a linked savings account as security for five years. The helper keeps ownership of the money and can receive it back with interest, provided the borrower keeps up with their mortgage payments. For a £250,000 home, that would mean a relative putting £25,000 aside for a fixed period, rather than giving it permanently to the buyer. However, there are important risks for whoever is helping. If the homeowner misses any payments, the person supporting them may have to leave their cash tied up for longer and could potentially lose some of their savings. Families should therefore make sure everyone understands exactly what they are agreeing to, and you should consider taking financial or legal advice before committing to anything. Buy with NO deposit with a 100% mortgage A small number of mortgages allow eligible buyers to borrow 100% of the property’s value, meaning they do not need a traditional deposit at all. Skipton Building Society’s ‘Track Record’ mortgage, for example, is aimed at renters and can allow buyers to purchase with no deposit. Applicants generally need to show they have paid their rent on time for the previous 12 months and they must otherwise meet the lender’s affordability and credit checks. The mortgage is available for borrowing of up to £600,000 in England, Scotland and Wales. This kind of product can be attractive to renters who can comfortably afford monthly housing costs but have struggled to save up a hefty deposit while paying rent. However, 100% mortgages come with significant risks. Because you begin with no equity in the property, even a relatively small fall in house prices could leave you in negative equity. That can make it harder to move home or remortgage, because selling the property may not raise enough money to clear your outstanding loan balance. You’d have to make up the shortfall from your savings. You are also borrowing more than someone who puts down a deposit, so you will generally pay more interest overall. A 100% mortgage therefore won’t be suitable for everyone, and buyers should carefully consider whether they could cope if mortgage rates or other household bills rose. Don’t just look at the deposit First-time buyers should also remember that the deposit is not the only upfront cost involved in buying a home. You may need money for solicitor fees, surveys, mortgage fees and moving costs, while some buyers will also pay stamp duty depending on the price of the property and where they live. First-time buyers currently pay no stamp duty on the first £300,000 of the value of their first home. If the property is more expensive, they pay 5% on the portion between £300,001 and £500,000. If the home costs more than £500,000, the relief does not apply. And a deal that gets you on the ladder sooner is not necessarily the cheapest over the long term. A larger deposit can unlock cheaper mortgage rates and lower monthly repayments, so it may sometimes be worth waiting and saving more if you can afford to do so. Buyers should compare the total cost of the mortgage, rather than simply choosing the option requiring the least cash upfront. Comment now