New 90% mortgage deal offers aspire to first-time buyers – but there’s a catch

Low-deposit mortgages are disappearing each day, but a new deal from Virgin Money could offer a solution to some first-time buyers.

Virgin’s new 90% mortgage requires borrowers to secure their rate for seven years, rather than the two or five years usually favoured by homebuyers.

Here, we assess whether this longer-term fix is sensible for first-time buyers wanting to get on to the property ladder.

What’s became of low-deposit mortgages?

First-time buyers have seen their mortgage options dry up because the COVID-19 outbreak began.

Data from Moneyfacts implies that you will find just 46 fixed-rate mortgages readily available for buyers having a 10% deposit, in contrast to 446 at the beginning of March.

For those with a 5% deposit, the amount has fallen from 273 to 12.

When the property market reopened in May, there have been hopes that low-deposit deals would return. However, the few lenders which have reinstated many have introduced caveats.

Nationwide bought back its 90% mortgages recently, however with limits how much of the buyer’s deposit might be gifted by a member of the family.

HSBC, meanwhile, temporarily suspended its market-leading 90% deals earlier this week, because it struggles to see a backlog of applications.

Virgin launches seven-year 90% mortgage

Virgin Money’s new seven-year fix is the only amount of its kind currently on the market.

Its seven-year period offers longer-term rate security, protecting borrowers against rises in mortgage costs.

On another hand, those who wish to move within the seven-year period may need to pay an early repayment charge (ERC).

In the first three years, the ERC is 7% from the outstanding mortgage balance, before dropping to 5%, 3% and 2% in years four, five and six. This could mean paying a lot of money to be able to get out of the mortgage and move house.

Theoretically, borrowers can ‘port’ their mortgage to another property, but this is going to be subject to valuations and affordability assessments,

There are a few other limitations, too. The offer is just on houses, not new-builds or flats, and it has a maximum term of 25 years – well below the 30 or 35-year terms many first-time buyers choose. (The ‘term’ is the amount of time you pay your mortgage off over. The longer the word, the lower your monthly obligations.)

How will the rate compare?

Virgin’s seven-year deal can be obtained by having an initial rate of two.99% (having a lb995 fee) or 3.09% (no fee).

Until a couple of days ago, HSBC offered the best rates on two-year and five-year 90% mortgages. These items have finally been withdrawn, meaning there’s little choice remaining for first-time buyers.

Cumberland Building Society and Penrith Building Society are offering market-leading 90% deals, however these are restricted to local applicants only.

This means Nationwide offers the very best nationally available 90% mortgages. Its two and five-year fixes are generally costing 3.24% (having a fee of lb999). As with Virgin’s deal, they have a maximum 25-year term.

Should I make an application for the Virgin mortgage?

This depends upon your circumstances. Seven-year fixes aren’t always ideal for first-time buyers, who may look to move home prior to the end from the fixed term.

In addition, the maximum term of 25 years may mean some clients who would ordinarily remove a 30 or 35-year mortgage simply won’t be able to pay the repayments.

Fixes of longer than five years could be a sensible choice if mortgage rates are very low and you’re buying your ‘forever’ home. For first-time buyers, it’s likely that neither of those circumstances will apply.

On another hand, Virgin’s deal is one of only a handful of choices for first-time buyers having a 10% deposit, so for many it might be the difference between purchasing a home and really missing out.

Have 90% home loan rates risen since COVID-19?

All of the present market-leading deals are significantly more expensive than those that were available before the pandemic, as shown within the table below.

Should I save for extended?

If you’re contemplating buying the first home with a 10% deposit, you have three options: you can make an application for one of the deals currently available on the market, hang on to see if cheaper mortgages return in the next six to Twelve months, or wait until you’ve saved a larger deposit.

Saving a larger deposit won’t be feasible for everyone, but if you can stretch from 10% to 15%, you could get a significantly cheaper rate and make big savings in your monthly repayments.

The table below shows the main difference on price from a 90% and an 85% mortgage.

How parents can help first-time buyers

A report released by Legal & General the 2009 week claimed 33% of first-time buyers will rely on help from their parents in the next 5 years, with parents lending typically lb20,000 towards a house deposit.

For many parents, this simply won’t be possible, but there are other methods to help.

Despite the COVID-19 outbreak, some providers continue to be offering guarantor mortgages, which allow parents to use their savings or property as collateral against their child’s mortgage.

Saving a home loan deposit

Whether you’re near to buying your first home or have just started saving, we’ve got lots of great advice that will help you improve your deposit.

If you’re in the last stages of saving, check out our guide on the basics of saving for any mortgage deposit, and think about the pros and cons of opening a lifetime Isa, which offers a 25% bonus in your savings.

If you’re just a little further down the line, we are able to help you find out how you can enhance your mortgage chances and apply for a mortgage.