About to take your first step on the property ladder? You’re in luck as lenders are reducing rates for buyers with small deposits.

Lenders are cutting mortgage rates for first-time buyers as competition among banks and building societies intensifies.

The average cost of a two-year fixed rate mortgage for people borrowing 95% of their home’s value has fallen to 3.25%, a 0.02% reduction compared with November.

Typical rates on a mortgage for people with a 10% deposit have fallen even further, dropping to 2.62%, 0.04% less than during the previous month, according to financial information group Moneyfacts.co.uk.

But average mortgage rates for people with a 15% or 20% deposit have actually increased month-on-month.

Darren Cook, finance expert at Moneyfacts, said: “First-time buyers or those borrowers seeking higher LTVs seem to have benefited the most during November, as providers appear to be once again competing for this business by driving interest rates down.”

The best buy rate for people with just a 5% deposit is now just 2.73% from Post Office Money, while rates for people with 10% to put down start at 1.84% from NatWest and Royal Bank of Scotland.

Why is this happening?

Competition among banks and building societies typically intensifies during the final quarter of the year as lenders focus on meeting their end of year targets.

During the summer months, competition was centred around people who had larger deposits, who represent a lower level of risk.

Reductions for people borrowing a higher proportion of their property’s value were more muted following a warning from the Prudential Regulation Authority that the Bank of England was keeping a close watch on mortgage rates.

But lenders have now turned their attention to first-time buyers, with renewed competition in this area of the market leading to them slashing their rates. 

Who does it affect?

Falling mortgage rates for people with small deposits is great news for first-time buyers.

Not only will the rate reductions save them money, but the lower monthly outgoings they will face on mortgage repayments also makes it more likely they will pass lenders’ affordability tests.

The fact that lenders are now focusing on this area of the mortgage market also suggests they are keen to lend to first-time buyers, despite the higher risk that borrowers with only small deposits represent.

What’s the background?

Although average mortgage rates have fallen for buyers with both a 5% and a 10% deposit, the larger reduction for the latter has widened the gap between rates charged to those borrowing 95% of their home’s value and those borrowing 90%.

Monthly repayments on a £200,000 mortgage at the average rate for someone with a 5% deposit of 3.25% would be £984.

But repayments for a first-time buyer with a 10% deposit average £917 – more than £800 a year less, highlighting the benefits of saving slightly more before getting on the property ladder.

Top 3 takeaways

  • Lenders are cutting mortgage rates for first-time buyers as competition among banks and building societies intensifies
  • The average cost of a two-year fixed rate mortgage for people borrowing 95% of their home’s value has fallen to 3.25%, a 0.02% reduction compared with the average in November
  • Average mortgage rates for people with a 15% or 20% deposit have actually increased month-on-month.

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