Buyers who put down a 5% deposit are being charged almost £300 more each month than those with a 25% deposit.
If you think you’re paying more than your friend or neighbour, this finding from AmTrust together with Moneyfacts could well be why.
Why is this happening?
The average value of a first-time buyer home is currently £157,557, according to data from the Council of Mortgage Lenders. Homeowners with a small deposit typically fork out £762 on monthly repayments.
So, a borrower able to put down a 25% deposit for a £157,557 home (which works out at just under £40,000 – no small change!) would need a mortgage worth £118,168. This could be available at an average rate of 1.42%.
Meanwhile, a buyer with only a 5% deposit (worth just under £8,000) on the same property would need to take out a mortgage worth £149,679. They’re therefore likely to be offered a much higher average rate of 3.66%.
So, the buyer with a lower deposit is paying around double the interest the other buyer’s forking out for.
In fact, the buyer with the bigger mortgage and higher interest rate will pay £294 more each month for their home than the buyer with the smaller mortgage.
Why do those with a larger deposit get a better interest rate?
First-time buyers are often the most likely to be charged higher mortgage rates. This is because they don’t have the sale of a property to rely on as a deposit, and have to save the cash instead.
Lenders tend to look more favourably on borrowers with a larger deposit because they present less of a risk. Because these buyers have a larger deposit, the mortgage provider is lending less money to them for a property of the same value as a buyer with a small deposit. This means they’re more likely to be offered a competitive interest rate.
What are the facts?
The average interest rate charged on a 5% deposit mortgage is currently 3.66%, compared with a typical rate of just 1.42% for a 25% deposit loan.
The good news for people with only small deposits is that the government still offers Help to Buy deals and has committed itself to help more first-time buyers get on to the property ladder until 2020.
Disclaimer: All information and links are correct at the time of publishing.