I’m a mortgage expert – little-known ways that first-time buyers can buy a home with just a 5% deposit

SOARING house prices are making it harder than ever for first-time buyers to get on the property ladder - but there are ways to buy a home with a small deposit. 

Ray Boulger, an expert at mortgage broker John Charcol, said it is possible to buy a home with a deposit of just 5%. 

But as the average UK house price in England has soared to £283,000, it is still no easy task to save enough for a smaller deposit.

According to the latest data from the Office for National Statistics, house prices have soared by 12.8% over the past year alone.

Anyone looking to put down a typical deposit of 10% to buy a home now needs to save a whopping £28,300 - and that's before you factor in extra costs such as legal fees and stamp duty.

At the same time, interest rates are rising which makes mortgage repayments more expensive. 

It means some buyers are having to think outside of the box to snag a property.

Ray said: “A few mortgage lenders are offering products that are aiming to fill the gap when the Help to Buy loan scheme ends.

“They’re a bit more complicated than a standard mortgage, so you need to do your research and go through a specialist broker, but it can help people buy a home they otherwise wouldn’t have been able to afford.” 

The Help to Buy equity loan scheme can get homebuyers on the property ladder with just a 5% deposit, but there are only a couple of months left to apply. 

The way it works is you put down a deposit of, say, 5% and get a loan for up to 20% of the value of the property (or up to 40% if you live in London).

That effectively reduces the amount you have to borrow - as if you’re putting down a 25% deposit including the loan, then you only need a 75% loan-to-value mortgage.

The government-backed loan is interest-free for the first five years, but you’ll give away a proportion of any gains you make through house price growth.

For example, if you bought a home for £200,000 with a 20% loan - the government would effectively have a 20% stake in the property, worth £40,000.

If you later sold the property for £300,000, then the government would still get 20% of the sale price, which would be £60,000, so you will have lost out on that profit. 

The scheme ends soon, but a number of companies are looking to plug the gap. 

Which companies are offering equity loans?

One such firm is Proportunity, which offers loans up to £150,000 or 25% of a property’s value. 

Ahauz is another, which offers equity loans to buyers with a 5% deposit. It will lend up to 25% of a property’s value.

Another firm, Even, offers interest-free equity loans for first-time buyers with a deposit as low as 7%. It will lend buyers two times their deposit (up to a maximum of £100,000). 

Similar to Help to Buy, it shares in the increase of the property price rather than charging interest. 

With each of these, the company only gives you the extra loan for your deposit - you still need to find a provider to lend you money for the main mortgage. 

Ray said: “The majority of people who used Help to Buy end up buying a bigger or more expensive property than they would have been able to otherwise. 

“Many were able to buy a house instead of a flat, for example, and these schemes could enable buyers to do the same.” 

What to be aware of

A major downside of these loans, however, is that the interest rates are often considerably higher than you’d pay with a standard mortgage. 

Ray said you will typically pay interest of between 5.5% and 9% on the loan, as well as giving up the gains on the property growth.

That compares with an interest rate of 3.89% on the typical five-year fixed rate mortgage at the moment.

The Sun previously spoke to one first-time buyer who is paying more than double the interest rate on his £30,000 Proportunity loan than he is on his standard mortgage. 

And Ray points out that these loans have technically been more expensive in the past couple of years as house prices have soared, which means you’re giving up more money as your property value rises. 

He said: “From a borrower’s perspective, these loans increase your borrowing capacity and mean you can get the property you want.

“So it may work out a good deal even if it’s more expensive.

“But if you can afford to buy without getting the loan - with a 95% LTV mortgage, for example - then it will work out cheaper in the long term, even if it means your monthly repayments are higher.” 

He adds that your mortgage options may be more limited if you use one of these loans, as fewer mortgage providers will lend against them. 

Another factor to consider is that some mortgage providers could actually offer you LESS if you take out these products.

They will factor in any loans or debt into affordability assessments, so may think you can't afford to borrow.

Some of the lenders also require minimum incomes. For example, Proportunity asks for applicants to be earning at least £30,000.

Ray said: “The key thing is that most borrowers will not be aware of these options so you need to discuss the pros and cons with an expert, and compare it to a standard mortgage.

Ray said: “Some people say it’s a way to ‘boost your deposit’ but I think that’s a bit misleading.

“It’s a company helping to fund your mortgage by giving you a different type of mortgage.” 

How else can I buy a property with a small deposit? 

Other options for buyers with a small deposit include the Deposit Unlock scheme, which lets you buy a new build house worth up to £750,000 with a deposit as low as 5%. 

You’ll need to buy the property directly from the builder to be eligible though. 

It’s a mortgage indemnity scheme, which effectively means the builder insures the mortgage that you take out. 

Only a few mortgage providers are signed up though, and you’ll need to check the housebuilder is too, so this may not work for many people.

Barclays also offers a so-called Family Springboard mortgage whereby a family member or friend can use their savings as collateral for your mortgage.

They’ll need to have the equivalent of a 10% deposit saved and be willing to tie it up for five years - but they will earn interest on it. 

Each week we speak to buyers about how they got on the ladder for our My First Home series.

One family bought their property with a deposit of just £12,000, and we spoke to a couple who sold their car to buy their first home.