Lloyds launches first-time buyer mortgage which requires just a £5,000 deposit – is it a good way to get onto the property ladder?

Lloyds Bank has become the latest lender to launch a low-deposit mortgage that could help first-time buyers get on the ladder earlier.

The high street bank is offering aspiring homeowners the chance to buy a property with just £5,000.

It will be available on homes up to £300,000 with a minimum deposit required of 1.66 per cent.

It means a first-time buyer can buy a £300,000 property with just £5,000 in savings, albeit they will need to make an allowance for legal fees and surveyor costs.

Eligible buyers will be able to borrow up to 4.5 times their annual salary. This means for the maximum £295,000 mortgage, someone would need to earn £65,556 a year, albeit a couple could buy with lower incomes as long as they collectively earn this much together. 

Lloyds Bank says it aims to provide an additional £500million of lending to first-time buyers over the next year.

However, it remains to be seen how many prospective first-time buyers will be tempted given it comes with a high interest rate of 5.89 per cent.

The five-year fixed rate product will mean someone buying a £300,000 property with the maximum £295,000 mortgage could expect to pay £1,881 a month if repaying the debt over a 25 year term.

Those able to stretch to a 5 per cent deposit could secure a 5.25 per cent rate with Nationwide for five years, while someone able to buy with a 10 per cent deposit could secure a rate of 4.82 per cent with Virgin Money right now.

Lloyds’ new mortgage comes with no product fees, while buyers can extend the mortgage term to 40 years in order to lower their monthly payments – although they will end up paying more in interest over the long run if they do. 

The new product will open to applications from May 18, and will be available directly through Lloyds and Halifax, and via brokers. It will be available to those buying both flats and houses.

The product will not be suitable for all first-time buyers, however. Those buying through shared ownership schemes, new build homes and with gifted deposits are not eligible.

A game changer for first-time buyers? 

Lloyds says it is aimed primarily at renters who may find it difficult to save tens of thousands of pounds for a traditional deposit without financial support from family.

The bank also says that saving for a deposit remains the single biggest barrier to home ownership.

Its research found almost two-thirds of aspiring first-time buyers say raising a deposit is now the hardest part of buying a home

For those without access to the Bank of Mum and Dad – only around four in 10 are able to rely on family support to help with buying costs – the challenge is even greater.

‘We hear time and again from those who are doing everything right – paying their bills, managing their money well, putting aside what they can – but still feel locked out of home ownership because saving a big enough deposit seems impossible,’ says Amanda Bryden, head of mortgages at Lloyds.

‘The reality is that many would-be buyers are already paying as much in rent as they would on a mortgage. 

‘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.’

Andrew Montlake, chief executive of Coreco mortgage advisers also thinks this is a ‘genuine shot in the arm for aspiring homebuyers’ – especially those who don’t have the luxury of the Bank of Mum and Dad behind them.

He says: ‘For many would-be buyers, the issue is not whether they can afford the monthly mortgage payments or whether they have a good credit record. 

‘The real mountain to climb is saving a big enough deposit while rents, bills and everyday living costs continue to take a hefty bite out of their income.

‘There are already some decent low-deposit and even 100 per cent mortgage options out there, but when one of the UK’s biggest lenders puts its weight behind this part of the market, it matters. 

‘It sends a message of confidence and gives more borrowers a realistic route onto the housing ladder.’

Risk of negative equity 

There will be critics out there who argue that such a product is a risky proposition in the current market.

Home values have barely moved over the last four years, according to Halifax and there is now evidence that values are falling across parts of the country.

Flats, which are popular among first-time buyers are performing particularly poorly, with increasing numbers of flat sellers now selling for less than they initially bought for.

A highly leveraged mortgage combined with falling property prices could put people at risk of negative equity in the future – where their mortgage is worth more than the home they live in.

Which other lenders offer low-deposit mortgages? 

Lloyds joins an array of other lenders offering low deposit mortgage options to first-time buyers at present.

Santander recently came out with a 2 per cent deposit mortgage for first-time buyers, as long as it is not below £10,000.

It means an eligible buyer could purchase a £500,000 home with just a £10,000 deposit. 

Yorkshire Building Society and Accord offers a £5,000 deposit mortgage up to as much as 99 per cent loan-to-value.

Newcastle Building Society offers a First Step mortgage for those with a minimum £5,000 deposit up to 98 per cent loan-to-value.

And Skipton Building Society offers the Track Record mortgage up to 100 per cent of the purchase price.