The scheme, launched by Lloyds Banking Group on May 18, aims to help first-time buyers overcome one of the most common hurdles to getting on the property ladder.
The five-year fixed rate mortgage at 5.89% and no fees is intended for first-time buyers buying a home worth up to £300,000 and who have at least £5,000 as a deposit.
Although it will potentially provide access to home ownership for those with small deposits, eligibility checks will still apply.
In fact, applicants must have a high credit rating and the loan amount is calculated at 4.5 times their income. Lloyds also said the scheme does not apply to those using shared ownership, buying new homes, or those who have received a gift deposit.
However, with the average first-time buyer household income of £56,351 and a home purchase value of £279,381, Lloyds’ low deposit mortgage has the potential to support many new buyers.
A buyer in this typical scenario would need to provide around £14,000 as a deposit, and this does not include the legal and other costs of purchasing the home.
Amanda Bryden, Chair of Halifax Intermediaries and Scottish Widows Bank, said: “With this new offer, brokers have a new option for buyers who have demonstrated their ability to manage their finances, other than depositing themselves and who receive greater certainty with a long-term fixed rate.
“A lower deposit can make it easier to save up for a deposit for many, or can help free up cash for other costs, such as moving or setting up your new home the way you want.”
What is the ruling on a new £5,000 mortgage?
Mortgage brokers have welcomed this new initiative from Lloyd’s, which provides another alternative for first-time buyers with small deposits.
This 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 Hollingsworth, Associate Director at Real estate loansHe said the launch of Lloyd’s was “significant” because it represented another major lender developing solutions for those with small deposits.
“There are now many deals where more than 98% of the purchase price can be borrowed or even no deposit is needed at all,” he said.
“This will help those who have good affordability but are held back by the need for a traditional deposit of 5% or more. With a purchase price of £300,000, this could mean a deposit of £5,000, rather than £15,000.”
£5k Lloyds Deposit Mortgage – what should buyers consider?
Hollingsworth warned that the scheme may not suit everyone. In fact, with average property prices for a first-time buyer in London and the South East at £464,646 and £302,396 respectively, there are likely to be buyers who do not qualify on the basis of value alone.
He also said those buyers who are able to put together a larger deposit may benefit from lower rates with other lenders.
Is there a risk of negative equity?
If home prices fall and mortgages are issued with a high loan-to-value ratio, there may be a greater risk of negative equity.
Borrowers using new Lloyd’s mortgages may be more vulnerable to this, but the five-year period should protect against this, Hollingsworth said. “A smaller deposit means a greater chance of negative equity if property prices fall,” he said.
“This only becomes a problem when the property needs to be sold, which would crystallize the loss.
“There is a big focus on affordability and a five-year fixed rate mortgage, so monthly payments will not be affected by changes in interest rates.
“This should help ensure payments can be controlled, and by the end of the five years, borrowers will have taken up their mortgage balance, hopefully avoiding any decline in house prices in the meantime.”
