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Santander has launched a new mortgage that allows first-time buyers to borrow up to 98 per cent of the property’s value, as competition intensifies among lenders to gain a larger share of the market for aspiring homeowners.
“My First Mortgage” will be open to first-time buyers with a minimum deposit of £10,000, up to a maximum £500,000 in borrowing and comes with no arrangement fee. The loan is a five-year fixed-rate deal charged at 5.19 per cent.
The move by Santander, one of the UK’s top six lenders by mortgage volume, is likely to prompt other big banks and building societies to come forward with improved deals, brokers said. First-time buyer borrowing is one of the most active parts of the mortgage market, accounting last year for about one-third of lending.
Santander said the biggest barrier to first-time buyers was not always affordability but the ability to save for a deposit. High rents and the rising cost of living had curbed the ability of potential buyers to put money aside.
Analysis by the bank found that enabling borrowers to take out a mortgage with a deposit of as little as £10,000 would reduce the time they need to save a deposit by about four years on average.
David Morris, head of homes at Santander, said: “Last year, the average first-time buyer with Santander put down a deposit of more than £85,000, a figure that can feel unattainable for today’s aspiring homeowners, whether that’s a result of more modest income, limited family financial support, rising rental costs and, in some cases, childcare expenses.”
The new mortgage is not free from constraints: Santander will only lend to buyers of houses, not flats, and Northern Ireland is excluded. Customers may borrow a maximum of 4.45 times their salary.
Andrew Montlake, managing director of broker Coreco, said the 5.19 per cent rate was “not far off” the rates currently charged on 95 per cent mortgages. “The fact you have to take on a five-year fix is very sensible because after five years of payments, you have a little less risk of going into negative equity.”
A five-year stretch of repayments, ideally combined with overpayments, gives borrowers a higher chance of falling into a lower loan-to-value range when it comes to refinancing at the end of the fix, particularly if house prices were to rise over the period.
Aaron Strutt, product director at broker Trinity Financial, said: “It often makes sense to make overpayments . . . if possible to try and reduce the loan-to-value so it’s closer to 90 or 95 per cent. This is where lots of lenders have more competitively priced rates.”
He pointed to deals at 95 per cent LTV from Skipton at 4.52 per cent for a two-year fix and from Clydesdale Bank at 4.54 per cent for a five-year fix.
The Treasury last year urged lenders to make first-time buyers a priority and set out a government-backed mortgage guarantee scheme for high loan-to-value loans as part of its plans to boost home ownership.
Other lenders have introduced products designed to appeal to cash-strapped first-time buyers. Skipton offers its Track Record mortgage at 100 per cent LTV, using a borrower’s record of rental payments to determine whether they can afford repayments. Barclays’ Family Springboard mortgage relies on a 10 per cent deposit from a family or friends to offer borrowers a loan, while Yorkshire Building Society offers a £5,000 deposit mortgage to first-time buyers.
Strutt said Santander’s scale could provoke more of the “big beasts” to follow suit. “This move may well tempt other big lenders back into offering more sub-5 per cent deposit mortgages to new customers.”