First-time buyers are being offered the chance to get on the property ladder with a deposit as low as £5,000 – but only if they have saved every penny themselves.
Newcastle Building Society has launched a “First Step” mortgage allowing borrowing up to £350,000 with just a 2% deposit.
But the deal comes with a strict ban on any help from the so-called Bank of Mum and Dad, which has become the biggest source of house-buying funds in Britain.
The mutual – the UK’s seventh largest – said it wanted to help those locked out of the market by high rents and soaring house prices, provided they could prove financial discipline by saving their own deposit.
Ben Smith, head of commercial and product development, said: “We’re committed to doing everything we can to ensure that aspiring homeowners aren’t locked out of the market simply because they can’t build the kind of deposit that many traditional mortgage products demand.
“First Step creates more accessible and affordable routes into homeownership and shows we’re committed to giving more people the opportunity to take their crucial first step onto the property ladder.”
The deal fixes repayments for five years at an interest rate of 5.25% – more expensive than some rival 95% mortgages, which are available at closer to 4.7-4.9% and often allow gifted deposits.
Nicholas Mendes, mortgage technical manager at broker John Charcol, said: “From the lender’s perspective, deposits built from a buyer’s own savings are seen as a stronger signal of financial discipline and resilience, whereas gifted or loaned funds don’t always provide the same reassurance.
“It’s unusual to exclude the Bank of Mum and Dad entirely, but it ensures the product is genuinely ring-fenced for those who’ve had to save on their own.”
Around half of all first-time buyers rely on parental help, according to Savills, with average gifts worth around £120,000.
Last year alone, parents handed out more than £9billion in loans or gifts, making them Britain’s biggest housing lender.
Ranald Mitchell, of Charwin Mortgages, told the Telegraph that products like Newcastle’s could “rebalance a market that too often favours those with access to the Bank of Mum and Dad”.
He added: “While the minimum £5,000 deposit headline will still translate to nearer £10,000 once fees and costs are factored in, the fixed rate and extended terms provide a fair and sustainable path to homeownership.”
David Hollingworth, of broker L&C, said: “It can be tough to save when paying a high rent so an option like this where as little as £5,000 could be enough can make buying more accessible, more quickly.
“Because of the higher borrowing on offer, the lender does want to see the commitment coming from the first time buyer and won’t allow the deposit to be a gift. It gives the lender a little more assurance that the borrower has got some personal contribution toward the purchase.”
However, experts warn small deposit mortgages carry higher risks. Borrowers can quickly fall into negative equity – where the property is worth less than the outstanding mortgage – if prices dip.
Mr Hollingworth added: “Although small deposit deals can accelerate the chance to purchase, especially when buyers feel prices are moving further out of reach, anyone borrowing at high loan-to-value is more vulnerable to the potential of falling into negative equity if house prices dip.”
The Newcastle deal is the first of its kind to completely exclude parental gifts. Rival lenders are also targeting low-deposit buyers: Yorkshire Building Society has a 1% deposit deal for homes up to £500,000, while April Mortgages has launched a 100% loan provided buyers fix their rate for at least 10 years.
