First-time buyers see sub-2% mortgage rates for first time since before the pandemic… – but potential base rate rise could soon kibosh them

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  • Mortgage rates are now falling the fastest with 5% and 10% deposits
  • This is 0.8% lower for the equity-rich after months of super-low rates
  • Buyers are returning to the market for the first time after the stamp duty frenzy
  • If the base rate rises – which it can do by the end of the year – rates could go up.
  • Should buyers take five years to lock in a lower rate? We explain the pros and cons

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Mortgage rates for buyers with 5 and 10 per cent deposits are falling by the highest rate of any home loan type, as first-time buyers return to the market after the stamp duty holiday.

Typical two-year term rates on 10 percent deposit mortgages commonly used by first-time buyers fell 0.29 percentage points to 2.56 percent in just the past month.


Meanwhile, the two-year fix on 5 percent of products saw a reduction of 3.32 percent, with an average of 0.25 percent reduction in the same period, according to the latest data from financial information service Moneyfacts.

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Falling mortgage rates mean it may be easier for first-time buyers to climb the ladder

The monthly decline was larger than that seen on 40 percent deposit mortgages, where rates have fallen dramatically in recent months and are currently deep in some cases as low as 0.8 percent.

These declines bring rates on low-deposit mortgages very close to pre-pandemic levels.

The lowest available rates are even cheaper, 1.79 percent and 2.67 percent—though they come with hefty system fees that can make them more expensive overall.

“This is a great time for a first-time buyer to find a really good mortgage deal,” says Matt Coulson, mortgage broker at Heron Financial.

‘We continue to expect things to slow down with rates continuing to come down, and while that hasn’t happened, we’ve seen rates continue to fall.’

However, those looking to climb the property ladder may have limited time to act on these lucrative deals.

Mortgage rates are likely to rise if the Bank of England’s base rate rises – a phenomenon now likely to occur by the end of the year.

“With inflation rising, we could see interest rates rise – especially if the Bank of England base rate goes up,” says Katie Braine, banking expert at financial information service Defaqto.

He said the rise in cost of living could make it more challenging for first-time buyers to pass lenders’ affordability checks.

These are the calculations that lenders make based on the salary and outgoings of potential home buyers.

‘Even the affordability of first-time buyers may decrease if the cost of living goes up,’ Braine said.

The current drop in rates represents a significant improvement in the prospects of the mortgage market for first-time buyers, who pulled 5 and 10 percent of deposit products from the market during the first national lockdown in 2020.

When they came back slowly, the rates were raised much higher than before to reflect the new caution on the part of lenders.

‘While the average fixed rate on high loan-to-value mortgages saw the most dramatic cuts last month, when you look at best buys in these levels, there is so much in between what’s on offer now compared to pre-Covid. Not the difference, says Mark Harris, chief executive officer of mortgage broker SPF Private Clients.

‘This illustrates how higher rates for those with smaller deposits increased during the pandemic as lenders viewed these borrowers as high risk.’

First Time Buyer Mortgages: Pre-Pandemic and Now
rate typebest buys october 2019best buy now
Two year fix, 10% depositBarclays @ 1.77%, £999 Fee, £0 @ 2.08%Halifax @ 1.79%, £999 fee
Two year fix, 5% depositHSBC @ 2.69%, £0 feeSkipton @ 2.67%, £495 fee
Five year fix, 10% depositVirgin @ 2.25%, £995 feePlatform @ 2.16%, £1999 fee
or HSBC @ 2.49%, £999 fee
Five year fix, 5% depositNewcastle @ 2.9%, £499Skipton @ 3.08%, £495 fee
Source: SPF Private Client Mortgage Brokers

According to Moneyfacts, as of this month, the average two-year term rate on a 5 percent deposit mortgage has dropped by about 1.5 percentage points in a year, from 4.74 percent in October 2020 to 3.32 percent today.

The normal 10 per cent two-year fixed rate is now about 1 per cent lower, from 3.64 per cent to 2.56 per cent – though product availability was strictly limited a year ago as lenders recovered from the lockdown.

Looking at the five-year fix, the general rate on a 5 percent deposit mortgage has fallen 0.45 percentage points over the past year, while it has fallen 0.84 percentage points on a 10 percent deposit product.

However, rather than looking for the lowest possible rate, buyers should also consider the impact of any arrangement fees.

By adding any fees to their monthly payments, they can work out the total annual cost of their mortgage. They may find that it is cheaper to charge a higher rate with a lower, or no, fee – as shown in the example below.

You can do this for your home purchase by using this is money mortgage calculator.

Best-value mortgage: 10% deposit, 5-year fix, £200K home purchase
lenderEmotionfeeannual cost
atom bank2.59%£400£9,868
Leeds BS2.69%£0£9,898
Source L&C/It’s Money Mortgage Tool

First time buyers are returning to the market

The combination of low rates, lockdown savings and a calm market is attracting a growing number of first time buyers to the property market.

According to Experian, daily mortgage applications among borrowers in their 30s were up 14 percent in September 2021 compared to the previous month, while applications in their 20s rose 9 percent.

The average daily mortgage application for those in their 30s was 20 percent lower when compared to September 2021.


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