The scheme, launched by Lloyds Banking Group on May 18, aims to help first-time buyers overcome one of the most common barriers to climbing the property ladder.
The five-year fixed rate mortgage, at a rate of 5.89% and no fees, is aimed at first-time buyers buying a home up to £300,000 and who have a minimum £5,000 deposit.
While it will potentially provide access to home ownership for those with small deposits, eligibility checks will still apply.
Indeed, applicants must have high credit and the loan amount is calculated at 4.5 times their income. Lloyds also said the scheme does not apply to people who use shared ownership, buy new-build homes or have received a gift.
However, with the average first-time buyer household earning an income of £56,351 and purchasing a home worth £279,381, Lloyds’ lower deposit mortgage has the potential to support many first-time buyers.
In this typical scenario, a buyer would need to save around £14,000 for a deposit, and that doesn’t include legal and other costs associated with buying a house.
Amanda Bryden, head of Halifax Intermediaries and Scottish Widows Bank, said: “With this new offering, brokers have a new option for buyers who have demonstrated the ability to manage their finances, save for a deposit themselves and take the greater security of a fixed rate for the longer term.
“A lower deposit can make it easier for many to save for a down payment, or it can help free up money for other costs such as conveyancing or furnishing your new home the way you want.”
What is the verdict on the new £5,000 deposit mortgage?
Mortgage brokers have welcomed this new initiative from Lloyds, which offers a new alternative for first-time buyers with small deposits.
It follows Santander’s My First Mortgage, a 98% loan-to-value (LTV) deal with a minimum deposit of £10,000, and Skipton’s Track Record Mortgage, a 100% deal for those with an impeccable rent payment history.
David Hollingworth, Deputy Director at L&C Mortgagessaid Lloyds’ launch was ‘significant’ as it marked a new lender developing solutions for people with small deposits.
“There are now several deals where it could be possible to borrow more than 98% of the purchase price or even require no down payment at all,” he said.
“This will help those who have good affordability but are held back by the need for the traditional 5% or more deposit. On a purchase price of £300,000 this could mean a £5,000 deposit, rather than £15,000.”
Lloyds £5k deposit mortgage – what should buyers consider?
Hollingworth warned the plan may not work for everyone. With the average first-time home price in London and the South East being £464,646 and £302,396 respectively, there are likely to be buyers who don’t qualify based on value alone.
He also said buyers who can come up with a larger down payment can take advantage of lower rates from other lenders.
Is there a risk of negative equity?
If house prices fall and a mortgage has been granted with a high Loan-to-Value (LTV) ratio, there may be a greater risk of negative equity.
Hollingworth said borrowers using Lloyds’ new mortgage could be more vulnerable to this, but the five-year term should protect against this. “A smaller deposit does mean a greater chance of negative equity if property prices fall,” he said.
“That only becomes a problem if the property has to be sold, which would lead to a loss.
“There is a strong focus on affordability and the mortgage has a five-year fixed rate, so monthly payments are not affected by changes in interest rates.
“That should ensure payments are manageable and by the end of the five years, borrowers will have eaten through their mortgage balance, hopefully offsetting any fall in house prices in the meantime.”