Mortgage blog: First-time buyers paying bigger premium than ever before

Posted 26 November 2014 by Keith Osborne

If you’re a first-time buyer with a small deposit then you will pay a bigger premium for your home loan than at any time since records began. That’s the conclusion of new research which has found that the gap between the best mortgage deals for borrowers with large and small deposits is now bigger than ever.

Borrowers with small deposits are now paying around £2,800 a year more for the same £150,000 mortgage as someone with a larger deposit.

Research from financial data analysts Moneyfacts has revealed that the extra cost of borrowing for consumers with a small deposit has reached its highest level since records began in 1995. Banks and building societies typically offer cheaper mortgage deals to customers with large deposits as these are seen as less risky.

For example, Moneyfacts’ research showed that someone with a 35% deposit obtained an average two-year mortgage rate of 2.46%. However, if you have just a 5% deposit you will be charged 5.27% on average.

The Daily Telegraph reports that on a loan of £150,000, the difference between the two rates was £231 a month, adding £2,772 a year to the mortgage payments of the borrower with the smaller deposit.

Keith Osborne, editor of, says: “The size of the deposit should not be the only sign of good credit and plenty of borrowers with greater equity could be considered ‘risky’. First-time buyers and those with a small deposit now have to pay thousands of pounds in additional interest. It is no surprise that the cost of mortgage finance is continuing to deter lots of first-time buyers from getting onto the property ladder.”

Moneyfacts found that rates for borrowers with 35% deposits fell by 0.8 percentage points between August and September. However, deals for borrowers with a 5% deposit fell by just 0.01 percentage points over the same period.

Recent figures showed that the number of first-time buyers fell by 3% in September, compared to the previous month. Council of Mortgage Lenders (CML) figures showed that just over 26,800 loans were issued to first-time buyers, worth £150,000 each on average. Despite the recent fall the figure was still 16% higher than the previous September.

Osborne adds: “There is a greater choice of 95% mortgages thanks partly to the government’s Help to Buy scheme. However, the cost of these deals remains high as banks would much rather lend to borrowers with big deposits. It seems likely that many first-time buyers are postponing their purchase until they can save a larger deposit in order to benefit from some of the more attractive products.”

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