House Doctor: 'Are we wasting our time trying to find a mortgage if we have only a 5% deposit?'

Question: Is there any kind of mortgage for first-time buyers with a 5 per cent deposit?

I see a lot about 90 per cent loan-to-value (LTV) loans but nothing for people like us who have at last just scraped 5 per cent (in our case, £7,500) for a flat worth roughly £150,000. Are we wasting our time?

Sean Argyle, Coventry

Answer: If you've managed to raise at least a 25 per cent deposit, shelves are groaning with home-loan bargains where rates hover close to 3 per cent. But struggle to gather the minimum 5 per cent and you'll find a near-empty store whose only goods cost the earth at nearly 7 per cent.

Research by Moneyfacts highlights your paucity of options. A list of mortgages allowing you to borrow 95 per cent of the property price shows a three-year fix with Yorkshire Bank or a two-year fix at Skipton Building Society – both at the same 6.99 per cent rate – and that's pretty much it.

"For your desired £150,000 flat, the Yorkshire deal, which also has a £599 fee, would mean paying a monthly £1,006," says David Hollingworth, of broker London & Country. "However, having a 10 per cent deposit you could instead grab a 4.99 per cent fix with the Co-op, costing just £788 a month."

The are plenty of reasons for the shortage of 95 per cent LTV deals. First, the mortgage market is almost unrecognisable from its go-go, pre-credit crunch self. Banks and building societies are unable to lend so freely with a stagnant housing market, high unemployment, uncertain economic growth and severely restricted credit.

Second, and more importantly, the expensive rates reflect how lenders gauge you as a risk in such a climate – with a high LTV and lack of confidence in property prices, a fall in the market could swiftly leave you in negative equity. And third, there is a higher cost to a lender of funding you with such a high LTV – which of course gets passed on to you.

"The knock-on effect of the credit crunch is that lenders are still reluctant to lend to those with relatively small deposits," says Melanie Bien at broker Private Finance.

"There is very little for those with a 5 per cent deposit; as such, borrowers are still deemed as being too high-risk.

According to Newcastle Building Society, stepping on to the housing ladder now requires an average deposit of 25 per cent on a property priced at roughly £143,000, from average salaries of just £21,800.

Sam Dunn, The Independent 30-07-2010

Consort Estate