The best mortgages for first-time buyers

There's a dearth of mortgages for new borrowers with a small deposit, but one or two lenders are offering decent deals.

Times are very tough for first-time buyers. Even though interests rates have fallen dramatically for many mortgage borrowers,  if you have a small deposit, your choice of mortgage deals is now tiny.

In fact, in the current mortgage market, there are only really two options if you want to apply for a 95% deal.

Option one: go it alone

Yorkshire Bank is offering three-year fixed rate deal with a reasonable product fee of £599 to cover the costs of setting the mortgage up. But the rate is... wait for it... a whopping 6.99%!

If you had a 40% deposit, you could get fixed-rate and tracker deals at 3%. So, by comparison, Yorkshire's mortgage looks impossibly expensive. But I'm afraid that's the reality of the situation if you only have a 5% deposit.

Or at least it was, until now....

Option two: get help from Mum and Dad

The second option is a newly-launched deal from Lloyds TSB called 'Lend a Hand', which could throw a lifeline to some struggling first-time buyers. The three-year deal offers a pretty competitive fixed rate of 4.39% to borrowers who can put down a 5% deposit.

That must sound like music to your ears - but there's a big catch. Lloyds are only able to offer such a low rate by taking a legal charge on a Lloyds savings account held by the borrower's parents.

The deposit paid by the FTB and the contribution from their parents must equal 25% of the property's purchase price. So, looking at it another way, this is essentially a 75% LTV loan passed off as a 95% LTV deal.

Parents will still retain ownership of cash held in the 'Lend a Hand' savings account, and will earn a competitive savings rate of 3.5%.

At the end of the deal, if the outstanding loan has fallen from 95% LTV to at least 90% of the property value, the charge on the savings account will be removed, and the mortgage can then be run independently.

So, if the Bank of Mum and Dad has some spare cash and they're willing to lend on a temporary basis, this could be a great solution for first-time buyers.

90% LTV mortgages

Thankfully, there's a wider choice available if you need a 90% LTV mortgage - and no need to rely on your parents for help! I'm afraid there's still a premium to pay for these more risky loans, but the rates are starting to look better. The table below shows five best-buy deals for first-time buyers with a 10% deposit:

Top 90% mortgages for first-time buyers

Source: Moneyfacts.co.uk. Deals with a higher lending charge have been excluded.

If you're looking for a 90% LTV mortgage then it's good to know you can now find a handful of deals with rates under 6%. 

HSBC could be a good place to start with a range of reasonably-priced variable and fixed-rate deals on offer to first-time buyers. But do watch out for the product fees. If you choose a fixed rate of 4.99%, you'll need to stump up for a fee of £1,499. Meanwhile, if you opt for a fixed rate of 5.49%, the product fee is only £199.

Plus, at the moment, HSBC currently takes three months to service its applications - so you won't find out if you'll be offered a mortgage for three months. By contrast, most other lenders only take two weeks to reach a decision.

Be even more careful of deals which charge product fees based on a percentage of the loan. Halifax's five-year fixed rate deal, for example, charges a fee of 2.5%. This means if you borrowed say, £150,000 it would set you back a staggering £3,750. No thanks!

Large deposits

But there's no question having a larger deposit really does open the door to a better deal. The market-leading HSBC two-year fixed rate deal at 2.89% is available to first-time buyers with a massive 40%. Again be prepared for a product fee of £1,499.

Alternatively, if you prefer a variable rate, HSBC also offer a two-year discounted deal at 2.49% with a far smaller fee of £249.

There are plenty of cheap trackers if you want to take a gamble on interest rates. Woolwich offers a best-buy offset lifetime tracker to first-time buyers with a 40% deposit. The current pay rate is 2.49% (bank base rate + 1.99%), with a product fee of £1,499.

But, if you would rather go for a deal with lower upfront charges, try First Direct's lifetime tracker with a current pay rate of 2.89% (bank base rate + 2.39%) and a fee of £799. This time the deal is available to borrowers with a 25% deposit.

There's still a very long way to go before the market before high LTV deals gets back to where it was pre-credit crunch. In fact, lending to borrowers with low deposits may never be quite the same again. But that doesn't mean you should give up. If the time is right for you to buy now, then by all means go for it. But you will have to accept that you won't get the best rates.

If you need help choosing your first mortgage, you can get free advice from our lovemoney.com mortgage brokers

More: Why it's better to go to a mortgage broker | Hope at last for first-time buyers