There are an increasing number of lenders willing to grant 90% mortgages to first-time buyers, but that doesn’t necessarily mean you should jump in without exhausting other possibilities.
You see, the cost of a 90% mortgage to first-time buyers compares quite poorly to those with a deposit of 15% or more; so much so that it could actually be beneficial to take out a separate loan to cover the difference.
Currently a first-time buyer with a 10% deposit can access a two-year fixed mortgage at a rate of 1.79%. Whereas having a 15% deposit in place would lower the rate on the same product to just 1.27% (meaning there’s 29% less interest to pay!).
If you’re reading this thinking a 0.5% difference in interest rates is negligible and all the mortgage rates seem very low, you’re right! But it can still make a real difference in the long-term.
Let’s say you’re thinking of buying a £250,000 house with a 10% deposit. On a repayment basis, you can expect to pay £931 each month towards the mortgage. But by raising your deposit to 15% those repayments would drop to £827 per month OR if you paid the same £931 a month as you were going to, the mortgage would be paid off three years quicker!
You may think you have little choice; and with the average property in Chichester selling for £377,309, even a 10% deposit will require £37,731! But if you consider that by borrowing the additional £12,500 to step up to a 15% deposit could save you £104 per month in this scenario, you could actually afford to borrow this sum at 10% (interest only) to be no worse off.
So even though the interest rates on a personal loan might be higher than a mortgage, the shorter length of the loan means you’ll pay it off quicker. This will boost the level of equity in your home, which will help when re-mortgaging in the future and could save you money in the long-term.
I’m not saying you should borrow more to stretch yourself and this certainly doesn’t constitute financial advice (you should consider contacting the registered professionals for that). But, I would urge you to ensure you’re accessing money as cheaply as possible to future-proof yourself and keep more money in your own pockets rather than in the banks’ coffers!