New £5K deposit mortgage – could it get you on the property ladder sooner?

Lloyds Bank and Halifax have launched a £5,000 deposit mortgage for first-time home buyers, allowing those with modest savings to access home ownership. Aspiring homeowners, particularly those paying rent, who struggle to build larger savings, could benefit from Lloyds' new mortgage offering and get on the property ladder sooner.

In this article, we explain who can get the £5k deposit mortgage, how it works and whether it is a good idea.

About the Lloyds £5k deposit mortgage

The £5k deposit mortgage is available to homebuyers where at least one of the mortgage applicants is a first-time homebuyer and can be arranged either directly through Lloyds / Halifax or via a mortgage broker.

To secure a £5k deposit mortgage with Lloyds or Halifax, you will need to meet the following criteria:

• At least one applicant must be a first-time buyer
• Up to 4.5 times income mortgage loans
• 5.89% interest rate on a 5-year fixed rate
• Mortgage loan amount must be between £97,000 and £295,000
• The maximum property purchase price is £300,000
• Minimum deposit is £5,000
• The deposit must not be raised through family support
• The purchase property cannot be a new build, conversion or renovation; a second home or home purchase under any part-share agreement; or a Right to Buy or Buy to Let scheme.
• Not available for remortgaging

How does the Lloyds £5k deposit mortgage compare with alternatives?

There are very few mortgage products that can be secured with a deposit as low as £5,000, but there are some, and we have compared these with Lloyds' offering in the table below. We have compared a £295,000 mortgage arranged on a capital and interest basis over 40 years using the lender’s minimum deposit. It is worth noting that Skipton Building Society and April Mortgages both offer zero-deposit mortgages.

Interest rates on mortgages change from time to time, so it is best to use our mortgage rate comparison tool to check the latest deals or speak with a mortgage broker* who can search and secure a deal on your behalf.

Lender	Interest rate	Fixed rate period	Product fee	Minimum deposit	Maximum property price	Total monthly payments over 2 years
Santander	5.60%	5 years	£0	£10,000	£510,000	£36,999
Skipton Building Society	5.69%	5 years	£0	£0	£600,000	£37,436
Lloyds / Halifax	5.89%	5 years	£0	£5,000	£300,000	£38,413
Yorkshire Building Society	6.45%	5 years	£0	£5,000	£500,000	£42,144
Accord Mortgages	6.64%	5 years	£125	£5,000	£500,000	£42,144
April Mortgages	6.70%	10years	£1,190	£0	£600,000	£42,463

The monthly cost for Lloyds' £5k deposit mortgage puts it somewhere in the middle of the pack among alternative low-deposit mortgage deals. However, a £300,000 cap on property prices might mean it doesn’t support some first-time buyers in London or the South East, where the average house price is currently above this. Santander and Skipton Building Society not only offer a higher maximum property purchase price but are also priced more cheaply and offer the same 'no lender fee' as Lloyds.

Should you low deposit mortgage?

You will need to weigh up the benefits of securing a mortgage with a limited deposit against waiting to save more money so you can put a larger deposit towards your home purchase. The obvious advantage of saving more money for a deposit is that you can usually secure a lower interest rate on your mortgage loan when your deposit is at least 5% or more of your property purchase price.

That said, there are many circumstances in which homebuyers would prefer to secure a mortgage, albeit with a higher monthly payment, rather than continue paying rent. The benefits will be greater for some than for others, and therefore, it is worthwhile doing some calculations to establish what is right for you.

A 10% deposit on a £300,000 house purchase - £30,000, could be secured at an interest rate of 4.82% based on the best current market rates. When compared with Lloyds and Halifax’s £5k deposit mortgage interest rate of 5.89% for an equivalent mortgage over 40 years, the alternative would result in a monthly payment that is £195 lower and a saving of almost £12,000 over the 5-year fixed rate period.

There is also the risk of negative equity to consider when securing a high loan-to-value mortgage. Buying a house where you own less than 5% of the equity in the house, based on a very low deposit, will leave you vulnerable to negative equity. Negative equity is when the value of the house falls by more than the equity you own. If you find yourself in negative equity, it may be difficult to remortgage when you come to the end of your mortgage fixed rate period.

The pros and cons of a low deposit mortgage

Pros

• Low upfront savings needed for the deposit
• No additional lender fee payable
• Available to self-employed and employed applicants

Cons

• Relatively high interest rate
• Risk of negative equity
• The maximum property price might be limiting
• A maximum of 4.5 times income loan might limit borrowing power
• The deposit cannot be supported by family members

Is the Lloyds £5k deposit mortgage right for you?

A mortgage that gets you into your first home with just £5,000 and no lender fees will be very attractive to many, but there are risks to weigh up, and you may also be limited by the fact that it is only available up to 4.5 times your income. Some of Lloyds’ competitors may offer up to 6 times your income to help you secure a larger mortgage loan if needed. On the flip side, Lloyds does allow self-employed applicants, where others do not. And then there’s the question as to whether you should carry on saving to build a larger deposit before buying your first home.

The best way to determine whether a low deposit mortgage is right for you is to speak with a mortgage professional. Mortgage brokers have a very good understanding of the mortgage market and how lenders differ based on your information, and can therefore quickly match you to your ideal mortgage and support you with your application.

If you do not have a mortgage broker, you can search for mortgage brokers in your local area using the online directory for financial professionals, Vouchedfor*. You can also seek online mortgage advice using the services provided by Habito* where mortgage brokers can provide advice, guidance and support over the phone and online to get you the mortgage you need. Mortgage brokers can quickly search thousands of mortgage deals to find the best terms and rates based on your specific needs and are also able to access mortgage deals that lenders make available only through a mortgage intermediary.

 

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