Lenders are willing to offer competitive mortgage rates to first time buyers with small deposits if they can secure a guarantor.
Research by Moneyfacts reveals first time buyers with a small 5% deposit and borrowing 95% loan to values are offered the mortgage lowest when they can secure a guarantor.
Lenders consider first time buyers with a small deposit and high loan to values (LTV) of 95% or even 100% as being risky with issues of affordability and this results in high mortgage interest rates.
In contrast home buyers or remortgage buyers with large deposits and lower LTV of 80% to 60% are lower risk and attract the most competitive rates.
A guarantor would deposit 10% of the property value with the lender which would be returned at the end of the preferential rate, typically two years.
Benefit of a guarantor for mortgages
First time buyers with a guarantor offer more security for lenders as it means if a homeowner defaults there are additional funds available to meet the lenders costs or third party to pay the mortgage repayments.
This often results in homebuyers being offered more competitive mortgage rates with a guarantor due to the lower risk to the lender.
A guarantor must be willing to commit thousands of pounds of security against the borrowers mortgage loan and agree to a legal contract requiring them to cover the mortgage if a first time buyer cannot make payments.
Moneyfacts research shows there are currently 11 providers with mortgages that require a guarantor across 29 products.
Mortgage interest rates from seven products for first time buyers are below 3.00% with the lowest rate for a discounted variable rate of 1.99% for two years and the guarantor must have savings of 10% of the purchase price.
For a first time buyer wanting a five year fixed rate mortgage, Barclays Bank offers a preferential interest rate at 2.75% fixed until 31 October 2024 with 10% of the property value deposited by a guarantor.
In contrast concerns of affordability are not an issue for buy-to-let investors as they must have a 25% deposit and show the rental income can exceed 145% of a notional mortgage interest rate.
Lenders becoming more risk averse
There has been a decrease in the number of mortgage products offered requiring a guarantor reducing from 36 in May 2019 to 29 in September 2019.
Providers are becoming more risk averse when lending to first time buyers with higher LTVs and so may not need to offer as many products with a guarantor.
Even so the Prudential Regulation Authority (PRA) gave a warning in May 2019 about higher risk mortgage deals with 95% LTV and with the cost of two and five year fixed rate products increasing in the last two months.
With stagnating house prices across many parts of the UK especially the South East and London, the market for first time buyers is more positive with more competitive rates from lenders.
Other sources of a deposit could be parents with remortgage buyers releasing capital gifting the savings to their children for a deposit on their first home.
First time buyers can receive help from other family members as the equity release buyer can access cash using a lifetime mortgage and gift the deposit for a home to children and grandchildren.
What are your next steps?
Talk to our London City Mortgage brokers for advice if you remortgage your existing home and want the best mortgage deal or release capital, buying your first home, moving home or a buy-to-let investor.
For older homeowners releasing equity from your property, our LCM mortgage advisers can recommend the lifetime mortgage, accessing wealth to repay an interest only mortgage or purchase a new car.
Start with a free mortgage quote or call us and we can take your details. Learn more by using the equity release calculator, mortgage monthly cost calculator, and property value tracker chart.
