Banks and building societies are introducing a wave of low- and no-deposit mortgages to attract first-time buyers, with Leeds Building Society the latest to launch a product requiring just a 2% deposit. The new 'Start Mortgage' allows buyers to purchase a home with as little as £5,000 on a £250,000 property, targeting those struggling to save large deposits amid economic uncertainty.
Market Slowdown Prompts Lender Competition
Mortgage applications from first-time buyers fell 9.1% in the second quarter compared to the same period last year, dropping from 131,682 to 119,749, according to Yorkshire Building Society data. Activity in the first half of the year declined 4.3%, as concerns over interest rates and economic conditions deterred many potential buyers. In response, lenders are competing aggressively with low-deposit products to revive demand.
Leeds Building Society's deal offers loans of up to five times a borrower's income at a fixed rate of 5.65% over five years. Borrowers need a minimum income of £30,000 and can buy homes worth up to £500,000. Self-employed applicants and gifted deposits from family are accepted. Matt Bartle, director of mortgages at Leeds Building Society, said: "Saving for a deposit remains one of the biggest hurdles for first-time buyers. By reducing that barrier to just 2% and combining it with flexible lending criteria, we're helping more people move closer to owning their own home."
Rise of 98% and 100% Loan-to-Value Mortgages
Rachel Springall, finance expert at Moneyfacts, noted the rarity of the 98% loan-to-value deal: "The Start Mortgage is a rare 98% loan-to-value deal and as applicants can borrow up to five times their income, this launch could make a meaningful difference for would-be homeowners who might otherwise remain stuck in the rental cycle." Other lenders have also introduced similar products. Lloyds offers a mortgage with a minimum £5,000 deposit for homes up to £300,000, while Santander provides a 98% loan-to-value product for properties up to £500,000.
Metro Bank has gone further with a 100% mortgage using a joint borrower, sole proprietor structure, allowing family members to support an application without becoming joint owners. Skipton Building Society also offers a 100% mortgage aimed at renters, and Yorkshire Building Society provides a 99% loan-to-value mortgage with a £5,000 deposit.
Higher Borrowing Comes with Higher Costs
David Hollingworth of mortgage broker L&C Mortgages warned that borrowing more typically means paying a higher interest rate. Those with a 5% deposit can find standard fixed-rate mortgages around 5%, while borrowers with 10% or more generally access cheaper rates and wider choices. The renewed competition follows easing mortgage pricing after volatility earlier this year. Moneyfacts data shows average two-year and five-year fixed rates both fell to 5.52% in June, after spikes linked to Middle East tensions.
Overpaying Could Save Thousands
Mortgage experts advise buyers to look beyond the initial purchase. Mortgage app Sprive estimates that borrowing £245,000 and overpaying by £100 a month from the start could save over £30,000 in interest and clear the loan three years earlier. Even an extra £30 a month could save more than £10,000 over the mortgage term.
