5% Deposit Mortgages – Most & Least Stable Property Markets in the UK

5% Deposit Mortgages – Most & Least Stable Property Markets in the UK

In the Spring budget, Chancellor of the Exchequer Rishi Sunak announced that the government would be providing guarantees for mortgages at 95% Loan-to-Value (LTV), meaning homebuyers will soon find it easier to purchase a home with a 5% deposit. 

While this will be an effective way of helping many people onto the property ladder who were struggling to save for a higher deposit, there are some things to keep in mind when shopping for a house with a lower deposit.

5% mortgages – the pros

With many of the UK’s major banks signed up to the scheme, 5% deposit mortgages should help people onto the property ladder who have found it difficult before. 

Many with decent salaries may struggle to generate the initial savings which means this lower threshold will be just what they’ve been looking for. 

This mortgage scheme may also helpfully make the market more accessible for single buyers, given that the average UK deposit can often be unattainable even for couples to reach.

5% mortgages – things to look out forCouple moving into their new home

Most banks will still have expectations around mortgage affordability, comparing your household earnings with the amount of money you expect to borrow. Generally, lenders will only offer you a loan of three to five times your earnings. For example, if your household income was £50,000, you could feasibly borrow up to £250,000 towards your mortgage.

With lower deposit rates, the amount of money you need to borrow is higher, meaning this could affect your affordability if lenders keep this loan-to-income ratio.

Additionally, low deposit mortgages mean you initially own less of the house outright so if the value of your property drops, it’s easier for you to fall into negative equity.

Negative equity is where you owe more in mortgage than your house is worth. This is one of the most significant risks with high LTV mortgages and is something you’ll need to consider carefully before going ahead with a house purchase.

What mortgage can I afford?

A 10% or 15% deposit will be more beneficial for buying a house as you will be able to pay back at a lower rate and you’ll own more of the house outright, helping you avoid negative equity. 

However, this doesn’t mean you should always avoid 5% mortgages. For many, these kinds of deals may be an essential stepping stone in purchasing a property and careful research will help make this a more secure plan.

Counties with the most stable house prices

By analysing average house prices over the past 10 years, TIC Finance has determined the most stable counties in the UK.

Region/Country County Times Prices Fell (10 years) Average Yearly % Change Current Average Price (Jun 2020)
East of England Southend-on-Sea 0 5.63% 292,500
South West South Gloucestershire 0 4.69% 279,000
South East Oxfordshire 0 4.56% 349,998
Wales Newport 0 4.06% 178,500
South East Portsmouth 0 3.72% 215,000
South East Slough 1 6.40% 324,863
South East Medway 1 5.79% 251,250
East of England Luton 1 5.53% 247,500
South West Bristol, City of 1 5.36% 273,500
East of England Bedford 1 5.23% 282,499
South East Brighton and Hove 1 5.18% 360,000
East of England Essex 1 5.13% 313,748
South East Kent 1 5.11% 298,998
South East Wokingham 1 5.07% 420,000
East of England Cambridgeshire 1 5.06% 300,750
South East Surrey 1 4.86% 440,500
South East Buckinghamshire 1 4.72% 393,625
South East Windsor and Maidenhead 1 4.72% 480,750
East of England Peterborough 1 4.61% 205,625
South East West Sussex 1 4.50% 326,500

Buying in counties where house prices have fallen the least often in the last 10 years may provide additional stability to your investment. In addition, reviewing the average yearly price change shows where the property market may perform best.

The most stable county in each region

Region/Country County Times Prices Fell (10 years) Average Yearly % Change Current Average Price (Jun 2020)
East of England Southend-on-Sea 0 5.63% 292,500
South West South Gloucestershire 0 4.69% 279,000
South East Oxfordshire 0 4.56% 349,998
Wales Newport 0 4.06% 178,500
Yorkshire and The Humber York 1 4.01% 245,000
East Midlands Leicestershire 1 3.93% 225,000
West Midlands Warwickshire 1 3.88% 254,000
North West Cheshire East 1 3.26% 237,498
North East Tyne and Wear 1 1.77% 148,000

Counties with the least stable house prices

Region/Country County Times Prices Fell (10 years) Average Yearly % Change Current Average Price (Jun 2020)
South East Southampton 3 3.60% 219,500
West Midlands Telford and Wrekin 3 2.74% 175,500
North West Blackburn with Darwen 3 2.47% 122,488
Wales Rhondda Cynon Taf 3 2.27% 115,000
Wales Isle of Anglesey 3 2.16% 177,500
Wales Neath Port Talbot 3 2.07% 120,500
Wales Wrexham 3 1.93% 153,500
Wales Carmarthenshire 3 1.73% 143,750
North East Northumberland 3 1.46% 165,475
Yorkshire and The Humber North Lincolnshire 3 1.46% 142,750
Wales Swansea 3 1.45% 154,500
North East Middlesbrough 3 1.28% 135,000
Wales Powys 3 1.17% 180,000
Wales Merthyr Tydfil 4 3.15% 113,500
Wales Gwynedd 4 1.67% 158,500
Wales Pembrokeshire 4 1.61% 180,000
North East Darlington 4 1.25% 142,850
Wales Ceredigion 4 1.20% 185,375
North West Blackpool 4 0.71% 118,000
South West Isles of Scilly 5 9.63% 367,500

Wales has arguably the least stable housing market, with a number of Welsh counties making the top 20 least stable for house price drops over the last 10 years.

Least stable county in each region

Region/Country County Times Prices Fell (10 years) Average Yearly % Change Current Average Price (Jun 2020)
East of England Thurrock 3 5.95% 285,000
South West Isles of Scilly 5 9.63% 367,500
South East Southampton 3 3.60% 219,500
Wales Ceredigion 4 1.20% 185,375
Yorkshire and The Humber North Lincolnshire 3 1.46% 142,750
East Midlands Nottingham 2 3.36% 141,250
West Midlands Telford and Wrekin 3 2.74% 175,500
North West Blackpool 4 0.71% 118,000
North East Darlington 4 1.25% 142,850

Tips from a property expert

Paran Singh, a financial advisor at TIC Finance provides some advice on avoiding negative equity:

  • Save as much deposit as you can – If you are able to save more than the 5% but will struggle to build up enough savings for 10%, consider paying a higher deposit to reduce your overall debt owed.
  • Stay put – Purchasing a house at this time with a high LTV mortgage will be a much safer option if you are planning to stay in the same place for a longer period of time. Unexpected circumstances aside, thinking long-term could mean you weather any house price changes that jeopardise your equity.
  • Only overpay your mortgage if you can afford it – High LTV mortgages generally have higher repayment rates so overpaying to improve your equity may not be possible. Only consider this option if you’re in a comfortable place financially.

Tips from a mortgage expert

Lloyd Edwards, Mortgage adviser from Bentley Holmes:

  1. A 95% mortgage is a good idea if it enables someone to get their foot on the property ladder and is the maximum amount of deposit they have. There is also the Help to Buy scheme from the government which supports this type of mortgage currently.
  2. Buyers should be aware that interest rates with this level of deposit can be higher, credit scores are scrutinised more by the lenders and lenders will also lend less at this level than with a higher deposit.
  3. It is worth waiting until April when the new government 5% deposit scheme is launched to see what more options will be available.

Sources

House price data are taken from the ONS.