Digital-only lender Atom Bank has launched a range of first-time buyer mortgages for those with just a five per cent deposit to put towards buying their first property.
The bank is offering two, three and five year fixes starting at a rate of 3.59 per cent, which all come with £500 cashback on completion and no arrangement fee.
This means that on the five-year fix, monthly mortgage payments on a £100,000 mortgage taken over 25 years would be £527.28.
It can only be arranged online, however, and borrowers interested in accessing the deal will need to go through a mortgage broker signed up to Atom’s systems, such as London & Country or Habito.
Half of all house purchases financed by a mortgage last year were made by first-time buyers
Last year, almost half of all house purchases financed by a mortgage were made by first-time buyers.
However the average house price paid by first-time buyers has skyrocketed by 50 per cent since 2012 and now stands at £210,515 – the highest level on record.
In response, more and more banks are designing products catering to potential home buyers who cannot afford a large deposit.
Taking a 95 per cent mortgage to purchase a property of this value today would need a deposit of £10,526.
On Atom’s five-year fixed-rate deal, monthly repayments would be £1,055 for this purchase if the deal was taken on a 25-year term. Overall, you’d pay £316,354.
It’s possible to bring monthly payments down by spreading them out over a longer period.
Atom Bank will lend over a maximum of 40 years – meaning you could pay £835 a month. Overall, you’d pay £400,603.
However, bear in mind that the longer you take the mortgage for, the more interest you’ll pay – making it more expensive over the lifetime of the loan.
What’s on offer?
The new 95 per cent loan-to-value deal is part of a wider range of new rates on offer to first-time buyers from Atom Bank.
All deals include £500 cashback along with a free valuation and no product fee.
The product range will be available for mortgages between 80 and 95 per cent LTV and there is the choice of various two, three and five-year fixed rate deals.
The two-year fixed-rate product comes with a rate of 3.59 per cent, the three-year with 3.89 per cent, and the five-year with 3.99 per cent.
The bank has also scrapped its previous £300,000 limit on first-time buyer loan applications.
Atom Bank’s Maria Harris said: ‘These deals will be attractive to first-time buyers who want to get onto the property ladder – it’s hard enough to find the money for your first home and we know that taking away fees and giving cashback helps.
‘We have extended the mortgage term to give younger home buyers a chance to get on the property ladder, reflecting that the retirement age is increasing and people are working for longer.
‘This means they can spread the cost of their home over a longer period, if they want to.’
Average house price paid by first-time buyers has skyrocketed by 66% since 2012 to £409,975
How does it compare?
The lowest rates on a 95 per cent LTV two-year fixed rate mortgages generally fall between just under 3 per cent and 4 per cent, depending on the level of fees involved.
For example, Marsden Building Society has a two-year fixed-rate mortgage at 2.89 per cent with a £1,249 fee at 95 per cent loan-to-value, while Yorkshire Building Society has a five-year fixed-rate mortgage at 3.85 per cent with a £495 fee at 95 per cent loan-to-value.
On the Marsden product, a £100,000 mortgage would result in monthly payments of £469 and overall repayments of £141,802, while Atom would result in monthly repayments of £505 and overall repayments of £151,639, but with £500 cashback.
In contrast, a home buyer putting down the average first-time buyer deposit at 16 per cent of a property’s purchase price would find rates ranging between just under 1.4 per cent and 1.6 per cent.
This means that for a property worth £200,000 with a 5 per cent deposit of £10,000 the homeowner would be paying around £910 a month, and pay an additional £83,769 in interest over the course of a 25-year mortgage.
However, if a homebuyer was able to pull together a 16 per cent deposit of £32,000, for the same property they would be facing monthly repayments of only £672 and only pay an additional £33,567 over the life of a 25-year mortgage.
It’s also worth bearing in mind that rates on 95 per cent LTV mortgages are dropping.
Research from Moneyfacts suggests that the average two and five-year fixed rates at 95 per cent loan-to-value have bucked the recent trend of rate rises, falling from 4.11 per cent at the start of the month to 4.06 per cent today.
This is Money verdict
These days, banks and building societies are far more willing to offer first-time buyers 95 per cent mortgages than they were in the years immediately following the financial crash.
Bigger deposits are always preferable as they usually secure lower rates for the homeowner as well as providing better protection against falling into negative equity. The lower the rate, the smaller the monthly repayment, meaning you can pay off the loan faster, thereby saving yourself potentially thousands of pounds in interest charges over the years.
However, this isn’t always a possibility for those trying to get onto the housing ladder.
First-time buyers could consider holding out and saving for a 10 per cent deposit, as at this point there are better rates and a wider selection of choices for the home buyer.
Charlotte Nelson, finance expert at Moneyfacts, said: ‘Competition in this sector is high particularly among lenders looking to revitalise their mortgage book by bringing new borrowers on board.
‘It’s not just rates providers are using to attract these new borrowers, as an array of different incentive packages and fees means borrowers can now tailor their mortgage to suit their needs.
‘While it is great news that 95 per cent LTV rates are falling, borrowers will need to bear in mind that they remain higher than even the rates at 90 per cent LTV. So, by saving an extra 5 per cent for a deposit, first-time buyers will still be significantly better off.’
It’s also worth bearing in mind that Atom Bank only sells through intermediaries, meaning that if you want access to its products, you will have to go through a broker.