When it comes to mortgages, it really is worth saving up for the biggest deposit you can afford. John Fitzsimons looks at just how much a small deposit will cost you in the long run.
The size of the deposit at your disposal when applying for a mortgage has rarely been so important. Two years ago, even if you had little or no money available as a downpayment on a house, you still had a wide range of options, and would not have had to pay much more than those with massive deposits.
All that has changed. There is now a significant difference in the rate you can access depending on just how much cash you can hand over upfront, and it's getting worse by the week.
I've put together some tables which show just how hard you will be hit if you only have a relatively small deposit.
The long-term fixers
Let's start with what in my view is the most sensible type of mortgage deal if you are about to buy your first home: five-year fixed rate mortgages. Below I have put together the market-leading deals in each loan-to-value (LTV) bracket, based on a 25-year repayment mortgage of £150,000.
|
Lender |
Loan-to-value (LTV) |
Rate |
Fee |
Monthly repayments |
Amount paid each year |
|
Post Office |
60% |
4.45% |
£599 |
£829 |
£9,948 |
|
HSBC |
70% |
4.84% |
£0 |
£862 |
£10,344 |
|
Clydesdale Bank |
80% |
4.99% |
£999 |
£876 |
£10,512 |
|
Royal Bank of Scotland |
90% |
5.99% |
£0 |
£965 |
£11,580 |
Now that's pretty shocking isn't it? My table shows that if you only have a 10% deposit (90% LTV) to put down, you will pay around £1,600 a year extra in mortgage payments, compared to a borrower with a 40% equity stake (60% LTV). Over the course of a five year deal, that means you'd pay an extra £8,160!
Even the jump between a 60% LTV mortgage and a 70% LTV mortgage is a difference of almost £400 each year, hardly an insignificant sum. And remember, these are the market-leading products. Should you go for a different product, the contrast is even starker.
A quick fix
So how do things change on a three-year fixed mortgage, again on a 25-year repayment mortgage of £150,000?
|
Lender |
Loan-to-value (LTV) |
Rate |
Fee |
Monthly repayments |
Amount paid each year |
|
Leeds BS |
60% |
4.25% |
£199 |
£812 |
£9,744 |
|
First Direct |
70% |
4.29% |
£599 (plus booking fee of £399) |
£815 |
£9,780 |
|
Furness BS |
80% |
4.45% |
£199 (with a completion fee of £800) |
£829 |
£9,948 |
|
Britannia BS |
90% |
5.79% |
£599 |
£947 |
£11,364 |
The good news is that there is precious little difference between the rates on offer if you have a 20% deposit compared to those with 40% equity burning a hole in their pocket.
However, if you are unable to convert your 10% deposit into a 20% deposit, then you will end up paying an extra £1,416 a year. That's an extra £4,248 over the course of the three-year deal.
Once again, while things are pretty close with the very cheapest products on offer, when you move beyond the market-leading rates, wider gaps do begin to emerge - so be sure to shop around.
Gambling on a tracker
And finally, I had a look at the variable mortgage products on offer at the moment. Personally I think you have to be crazy to even consider a tracker mortgage at the moment, because I think interest rates will only go up in the near future, not down. But for the sake of balance, here are the best deals on a three-year variable deal.
|
Lender |
Loan-to-value (LTV) |
Rate |
Fee |
Monthly repayments |
Amount paid each year |
|
Co-operative Bank |
60% |
2.99% (BBR + 2.49%) |
£0 |
£710 |
£8,520 |
|
Co-operative Bank |
70% |
2.39% (BBR + 1.89%) |
£995 |
£664 |
£7,968 |
|
Furness BS |
80% |
3.49% (BBR + 2.99%) |
£499 |
£750 |
£9,000 |
There are no products available at 90% loan-to-value on a tracker basis, though certain small building societies (such as Cumberland BS) are offering deals at 85% loan-to-value to local borrowers.
While there is an obvious anomaly with the 70% LTV deal from the Co-op, which is the market leader by a fair distance, it again shows that those with a 40% deposit face much smaller payments than those with just 20%.
It's all about choice
Of course, it's not just about the cheapest products, but also how many different mortgages you can choose from in each loan-to-value band.
The table below, which comes from mortgage sourcing firm TrigoldCrystal, outlines just how scarce high loan-to-value deals are - and how the situation is getting worse.
|
Loan-to-value (LTV) |
Number of products week ending 10/06/2009* |
Number of products week ending 17/06/2009* |
Number of products week ending 24/06/2009* |
|
90%+ |
224 |
180 |
178 |
|
85% |
664 |
591 |
620 |
|
80% |
1149 |
1135 |
1166 |
|
75% |
3490 |
3399 |
3126 |
|
70% |
4242 |
4085 |
3710 |
|
65% |
4686 |
4525 |
4156 |
|
60% |
5920 |
5687 |
5308 |
*Totals combine purchase and remortgage mortgages
While the number of products available in each loan-to-value band has decreased over the past fortnight, there is still a stark difference between the choice on offer for those with a large deposit, and those with just a small cash sum - 5,308 mortgage deals compared to just 178.
It's the deposit, stupid!
One thing to bear in mind are house price movements.
House prices appear to be, if not at the bottom, then pretty close. Bear in mind that as house prices rise, the size of the deposit you'll need for, say, a 60% LTV deal will only increase. You will have to make up your own mind as to whether that is motivation enough for you to put down your deposit and go for that more expensive mortgage now, or whether you would be better off sitting tight and saving up a bit longer for a larger deposit.
What is clear is that not only do those with a large deposit currently have the benefit of a cheaper mortgage deal in the long run - they also get the widest choice in who they wish to borrow from. If you only have a small deposit, your options are infinitely more restricted. So don't delay - start saving up today...
More: Goodbye, cheap fixed rate mortgages | Fix your mortgage rate before it's too late!