FTBs could gain from smaller deposits

First time buyers could be better off putting down smaller deposits on a property because of an anomaly in the higher lending charge (HLC) system, according to Fool.co.uk.

Fool.co.uk claims homebuyers who put down a 5% deposit could actually end up paying more for their mortgage than those placing a 4% deposit.

The website says HLCs are typically applied to all loans of more than 90% LTV and usually cost around 1.6% of the value of the loan. However, many lenders offering loans of between 96% and 100% do not charge an HLC, according to Fool.co.uk.

HLC costs are also not included in many loan comparisons, because the calculations made to assess the charge are complex, meaning many buyers might not realise there are extra costs involved.

Fool.co.uk says a two-year, fixed rate, 95% mortgage of £142,500, at the best headline rate, will cost £26,296 over two years.

However, a £144,000 loan at 96% LTV will cost £25,206 over the same period, a saving of £1,090.

Fool.co.uk also points out that those using the 96% deal will also save a further £1,500 due to the lower deposit required, meaning those on mortgages that allow overpayments can effectively pay the 5% deposit whilst side-stepping the HLC.

Jane Baker, mortgage expert at Fool.co.uk, comments: “It is possible to put down a smaller deposit and still pay less. This goes against the grain as intuitively it makes sense to pay the largest deposit you can manage. But remember, it's essential to look at mortgage deals in their entirety taking into account all the costs that apply.”

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John Bakie
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e-mail: John.Bakie@incisivemedia.com