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There are tentative signs that first-time buyer mortgages are beginning to return, but borrowers are being hit by higher costs and more restrictions from banks.
As the country went into lockdown, banks withdrew virtually all loans for customers with 5pc and 10pc deposits. Although the property market has since reopened, the lack of suitable mortgages has left first-time buyers unable to purchase a home.
However, there are signs that lenders are slowly returning to this market. Figures published by Defaqto, the industry analyst, show that 10 new 90pc mortgages have launched in the last three weeks.
Small deposit customers now have a choice of 28 loans from providers including First Direct, HSBC, Metro Bank and Nationwide.
The lack of competition among banks means that interest rates for 90pc loans are significantly higher than those for customers with larger deposits. While this disparity is usually present, Chris Sykes of mortgage broker Private Finance said that the gap was widening.
For example, Metro Bank’s five-year fixed-rate 90pc mortgage had an interest rate of 3.29pc. By saving a further 5pc deposit, the customer could achieve a 1.89pc rate elsewhere.
This hiked interest rate equates to far higher monthly payments. Based on the average house price of £232,000, a customer with a 10pc deposit and a 25-year term would be hit with repayments of £1,022 each month, with an interest rate of 3.29pc. But a borrower with a 15pc deposit would pay £825 a month, given an interest rate of 1.89pc.
“Increasing loans by 5pc causes the interest costs to jump up,” he said. “This is indicative of both the uncertainty in the market, coupled with extremely high demand for borrowing in this bracket.”
Mr Sykes said that he feared interest rates would be “eye-wateringly high” if mortgage lenders returned to 95pc in the near future.
Katie Brain, of Defaqto, said that while banks were returning, deals were often only available for a few days before being withdrawn.
“It is encouraging to see lenders returning to the market and new deals coming out for those with small deposits,” she said. “We are seeing many come onto the market for only a few days and so borrowers will need to act quickly to secure these deals.”
Some lenders have taken steps to limit the number of customers that can apply for loans. During the pandemic HSBC has only issued a limited number of small-deposit mortgages each day.
Meanwhile Nationwide, which returned to the market in July, has placed restrictions on gifted mortgage deposits. It stipulates that parents and family members can only contribute 25pc of a deposit and that the remainder must be provided by the applicants themselves.
According to Defaqto, the only lender currently offering 95pc mortgages is the tiny Furness Building Society, based in Cumbria. However, applicants must be located in the local area, ruling out the vast majority of first-time buyers.
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