Low Deposit Mortgages Have Higher Interest Rates

Research has revealed that there is a substantial difference in the cost of a mortgage depending on the level of deposit available. That is, perhaps, not surprising as mortgages with a high loan-to-value proportion will be viewed by the lender as a higher risk arrangement, but what it means for the ordinary borrower is that the most competitive deals will only be available if you have a large deposit. For those with a small deposit, the headline rates advertised are probably unachievable.

This huge difference in mortgage interest rates that borrowers are faced with can mean that some loans are as much as twice as expensive over their lifetime as other loans. With so many people worrying about the high cost of purchasing a home they might actually be better served worrying about the mortgage interest rate they will have to pay as this can make such a huge difference to the overall cost of purchasing a property.

Based on recent figures, the most inexpensive mortgage rate for those borrowers with only a 10 per cent deposit has an interest rate of more than double that of the cheapest deal available to those with a 40 per cent deposit.This is a stark reminder of how a low deposit buyer is faced not only with limited choice of home loans but also higher rates on those for which they are eligible. With tools and charts now available to show the borrower the true cost of a repayment mortgage over its lifetime it can be depressing reading for potential home buyers with a low deposit. Of course, the upside of all this information being available is that a borrower can, at least, make a fully informed choice when deciding which lender to opt for.

A borrower with a 10 per cent deposit could pay as much as 60 per cent more than a borrower with a 40 per cent deposit for a property with the same purchase price. The difference can be even greater if the deal is fixed for a short period, such as 2 years, before reverting to a standard variable rate. So there is little good news currently for buyers with only a 10 per cent deposit, an amount that back in 2007 would have been considered a reasonable deposit for a first time buyer.

What this data reveals is something that mortgage brokers have known for some while, namely that lending institutions are heavily favouring what they perceive to be ‘low risk’ lending,preferring a customer with both a large deposit and a large mortgage value to first time buyers who traditionally have only had a small deposit. No longer are some lenders taking a view on how much a borrowers earnings are likely to increase, in fact, it might be more accurate to say that many lenders want only no risk borrowers rather than low risk borrowers. With lenders keen to attract high net worth mortgage customers, it has never been more important to put down as high a deposit as possible in order to benefit from the best interest rates.

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