First-time buyers: how to get the best deal on the 90% or 95% mortgage

First-time buyers with small deposits may now think it is easier to obtain a mortgage, with 90% and 95% deals more easily available.

The government’s mortgage guarantee scheme has resulted in dozens of new low-deposit deals being launched, and minute rates are falling.

Here, Which? reveals the best rates open to first-time buyers and gives advice on buying the first home in 2021.

Low-deposit mortgage deals return

Nine in ten 90% and 95% mortgages were withdrawn from the market within the wake of the Covid-19 outbreak last spring.

A year on, situations are looking much better for first-time buyers with small deposits.

The vast majority of major lenders have cut back their 90% mortgages, and the 95% mortgage guarantee scheme launched in April has led to a flurry of deals coming back to the market.

The graph below shows how the quantity of low-deposit deals has risen because the end of 2021.

What is the mortgage guarantee scheme?

As you can see above, lenders have been slowly returning 90% deals since the end of this past year, but up to now there wasn't any manifestation of 95% mortgages returning – meaning first-time buyers would need a first deposit with a minimum of 10% to purchase a home.

With this in mind, the federal government launched a new mortgage guarantee scheme in April. The scheme requires the government encouraging lenders to offer 95% mortgages if you take on some of the financial risks involved, for example if a buyer defaults on their own loan.

The guarantee continues to be successful so far, with 170 fixed-rate 95% deals now available, compared to just five at the start of March.

As a purchaser, it makes no difference if the 95% deal you select belongs to the scheme or sits beyond it, so when comparing deals, be sure you concentrate on all the available alternatives – whether they’re area of the scheme or not.

Best rates on 90% and 95% mortgages

The mortgage guarantee scheme has certainly made a difference to the number of options available to first-time buyers.

Rates on 95% mortgages are dropping as lenders compete for business, but remain significantly higher than those on 90% deals.

The tables below show the least expensive initial rates now available for first-time buyers with 10% and 5% deposits respectively.

90% loan-to-value

90% mortgages remain more expensive than before the pandemic, however the cheapest two-year fixes have dropped on price by 0.3% this month.

Buyers who can’t afford or don’t want to pay up-front fees can instead take a slightly more expensive rate. On a two-year fix, it’s easy to obtain a fee-free deal for 0.29% more than the least expensive rate. On a five-year fix, the gap is 0.13%.

Lowest rates on 90% two-year fixed-rate deals

Lowest rates on 90% five-year fixed-rate deals

Rates checked 20 July 2021.

95% loan-to-value

Rates on 95% mortgages will also be dropping, albeit slower than 90% deals, because the initial rush caused by the mortgage guarantee scheme cools down.

On a two-year fix, buyers could possibly get a fee-free cope with reasonably limited of 0.15% on the cheapest rate. On the five-year fix, the extra price is just 0.01%.

Lowest rates on 95% two-year fixed-rate deals

Lowest rates on 95% five-year fixed-rate deals

Rates checked 20 July 2021.

How much can I borrow having a low-deposit mortgage?

When taking out a 90% or 95% mortgage, you can usually borrow as much as four-and-a-half times your annual income.

As an example, if you and your partner collectively earn lb50,000, you ought to be able to borrow around lb225,000, so long as you satisfy the other criteria banks have in place.

There are exceptions. Nationwide recently announced it would allow first-time buyers to borrow five-and-a-half times their salary on mortgages up to 90% loan-to-value. Which means that with this lb50,000 salary, you'd theoretically have the ability to borrow up to lb275,000.

If you’re unsure about how exactly much you might be able to borrow, or want to know which lenders might offer you the largest mortgage, it’s worth taking advice from the large financial company.

How hard could it be to buy your first home?

Even with improving mortgage rates, it’s a tough time to purchase your first home, with property prices continuing to rise.

A report by the Resolution Foundation implies that the deposit needed to get on towards the property ladder has tripled in real terms over the last Two decades, rising from lb11,000 to lb33,000.

Looking further back, the price of purchasing a first-time buyer property has increased by a lot more than two-thirds over the last 50 years.

Lindsay Judge from the Resolution Foundation says: ‘The good news for first-time buyers today is that they are set to accrue more property wealth using their first home than any previous generation.

‘But which makes it all the more frustrating that for a lot of young families without accessibility Bank of Mum and Dad, homeownership is just unrealistic.’

Which? Money Podcast: how to buy the first home in 2021

In last week’s Which? Money Podcast, we delved in to the issues facing first-time buyers in 2021, including a unique interview with the housing minister Chris Pincher. You can listen to the entire episode below.

This story was originally published in January 2021. It's regularly updated with the latest 90% and 95% mortgage deals and rates. The final update was on 20 July 2021.