A major British bank is offering mortgages to first-time buyers who have a deposit of just £5,000 – but experts are warning the deal may not be as good as it seems.
Lloyds is the first major bank to offer the deal in the UK, following in the footsteps of other lenders like the Yorkshire Building Society who have offered similar schemes.
Santander launched a similar offering in February, giving buyers the chance to get a mortgage of up to £500,000 in return for a £10,000 deposit.
However, experts warn that these low-deposit deals have echoings of what was on offer before the 2008 housing crisis.
What is the deal with the new Lloyds mortgage?
The new deal from Lloyds will give first-time buyers 98 per cent mortgages to help them get on the property ladder.
It will be available on homes up to the value of £300,000 and offers a five-year fixed rate and no product fees.
READ NEXT: Affordable places to live in London
The scheme is designed specifically for those who have had no help from their parents in terms of building their deposit.
Lloyds’ mortgage deal will also be offered via Halifax and other brokers. However, the deal only allows buyers to borrow up to 4.5 times their income.
Buyers will be offered a five-term fixed term of 5.89 per cent interest.
Amanda Bryden from Lloyds said the new offering is suitable for renters, as they will be paying as much in rent as they would for a mortgage.
“The reality is that many would-be buyers are already paying as much in rent as they would on a mortgage,” she said.
“By cutting the upfront cost to £5,000 we’re breaking down a major barrier to getting on the property ladder. This gives people a better chance to own their first home and start building a more secure future.”
RELATED: Should we all just move to Nantwich?
The lender also stresses that borrowers will need to undergo rigorous affordability and credit checks, to ensure that they will be able to keep up with payments.
What are experts saying about the new £5k deposit mortgages?
David Hollingworth, of L&C Mortgages, told The Telegraph that low-deposit mortgages come with bigger risks for buyers.
This is because they risk falling into negative equity if the price of their house falls.
“A smaller deposit does mean a higher chance of negative equity if property prices fall. That only becomes a problem where the property needs to be sold, which would crystallise a loss,” he told the outlet.
“There’s a big focus on affordability and the mortgage is a five-year fixed rate, so monthly payments won’t be affected by changes to interest rates.
He added: “That should help ensure that payments are manageable and by the end of the five years borrowers will have eaten into their mortgage balance, hopefully riding out any dip in house prices in the meantime.”
Low-deposit mortgages were common before the 2008 financial crisis, but many were too risky and they played a part in causing the economic crash.
However, there are now much stricter regulations on banks offering out loans.
Lenders must now assess borrowers’ net income against their spending, rather than just their gross salary. Plus, the Bank of England forces lenders to restrict mortgages offering more than 4.5 per cent
The Mortgage Uni’s Peter Stamford previously told City AM of his concerns following the increase in 99 per cent loan-to-value mortgages.
“It’s a high-stakes gamble and could potentially fuel yet another house price bubble,” he said.
Others are more optimistic about Lloyds’ offering though.
Dev Malle, Chief Business Development Officer at My Home Move Conveyancing, said the deal was “encouraging” and that “increased competition among lenders should help keep interest rates more competitive.”
He said: “For the vast majority of prospective buyers – especially those with young families or without any family financial support – saving a large deposit is the biggest hurdle.
“When you consider that many are already paying rent equal to or higher than a mortgage payment, their affordability is already being tested in practice, to some extent. It’s encouraging to see major lenders applying that same logic to their lending policies.
Malle said the £300,000 cap on property value will “helps ensure repayments remain manageable, reducing the risk of overexposure for both the lender and the borrower.”
He added: “With a major high street bank like Lloyds introducing this scheme alongside existing low-deposit schemes by other lenders, first-time buyers now have more options. In a softening market, this increased competition among lenders should help keep interest rates more competitive, making the housing market more accessible for first-time buyers.”