First-time buyers offered 2% deposit mortgage – but those using Bank of Mum and Dad are BANNED

First-time buyers can buy a home with a deposit of as little as £5,000 using a newly-launched mortgage – but not if they are using the Bank of Mum and Dad. 

Newcastle Building Society, the seventh-largest mutual in Britain, is now offering borrowers the chance to get on the property ladder with a deposit of just 2 per cent. 

Known as First Step the mortgage offers borrowing of between £96,000 and £350,000. The 2 per cent deposit must be at least £5,000.

However, all of the money must come from the borrower’s own savings. Anyone who has received a cash gift or loan towards their house deposit, can’t apply. 

Newcastle said it wanted to help first-time buyers struggling with rising house prices and high rents to get on the property ladder.  

First home: Newcastle BS’s mortgage is aimed at home buyers with lower deposits, but who have not had any help from friends or family 

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.’

Lenders also like buyers who save their own deposits, rather than relying on family help, as it shows that they can manage their money. 

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.’

David Hollingworth of broker L&C added: ‘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.’

Is it a good deal?  

Borrowers considering the First Step mortgage will need to do the sums to see if the £5,000 minimum deposit works out for them. 

They will also need to be comfortable fixing their mortgage for five years, as a two-year fix isn’t available. 

Using the First Step mortgage, someone could buy a £250,000 home with a deposit of just £5,000 which is 2 per cent of the purchase price.

If they wanted to buy a £350,000 property, they would still need to put down 2 per cent or £7,000. 

However, if they were buying a £125,000 home, they would still need to put down the minimum of £5,000. 

This would mean they were paying a 5 per cent deposit – in which case they should consider looking elsewhere. 

A 5 per cent deposit is the minimum required for many banks and building societies, and hitting that means the buyer could qualify for cheaper mortgage deals than Newcastle’s offer. 

The interest rate on the First Step mortgage is 5.25 per cent. This is more expensive than 5 per cent deposit mortgages on the market, some of which have rates as low as 4.7 per cent. 

Mendes added: ‘At 5.25 per cent, this deal is pricier than standard 5 per cent mortgages, which can be found closer to 4.7 to 4.9 per cent and often allow gifted deposits. 

‘So, while it could help a small group of buyers, it won’t necessarily be the most cost-effective route. 

‘This is where speaking to a broker is key: looking beyond the headlines, weighing up the wider market, and finding the right fit for a borrower’s circumstances.’

Data from rates scrutineer Moneyfacts shows there are more options for those with five or 10 per cent deposits than at any point since the 2008 financial crisis. 

It said there are 845 products now available for buyers with a 10 per cent deposit, and 442 products for those with 5 per cent. 

First-time buyers with deposits of less than 5 per cent still have have several mortgage options, however. 

New lender April Mortgages offers a 100 per cent mortgage, though applicants must fix their rate for at least 10 years. 

Yorkshire Building Society has a 1 per cent deposit mortgage, for those who can put down a deposit of at least £5,000. The maximum property value is £500,000 and it can’t be used on new-build homes.  

Anyone considering a low-deposit mortgage should be aware that their interest rate and repayments will be higher than if they had put down more money upfront. 

They should also know that they are at higher risk of negative equity – when house prices fall and a home becomes worth less than amount they borrowed to buy it. 

This can make it difficult to remortgage or sell. 

Hollingworth adds: ‘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. 

‘If there was a need to sell at that point then it could leave them having to find additional funds to cover a shortfall but as long as the mortgage remains affordable, many will be able to ride out any ups and downs.’