Trusting first-time buyers stung by hidden charges

Fool.co.uk has discovered that first-time buyers who put down a 5% deposit pay more for their mortgages overall than borrowers who put down just a 4% deposit, due to enormous hidden charges.

The personal finance website has uncovered an anomaly in the mortgage market that means first-time buyers who put down a 4% deposit can neatly sidestep Higher Lending Charges (HLCs) and slash the cost of climbing onto the housing ladder. However, first-time buyers who put down a larger deposit have to pay these punishing charges and so suffer bigger costs.

HLCs were introduced by lenders to safeguard them from loss if borrowers default on mortgage repayments. Because the cost of a HLC is complicated to calculate, many borrowers fail to take them into consideration when comparing different deals.

Typically, people who borrow over 90% of the property value pay HLCs, which cost around 1.6% of the home loan. But bizarrely, lenders who offer mortgages between 96% and 100% don’t impose a HLC.

This leaves an odd situation where you pay HLCs if you put down a 5% to 9.9% deposit. But if you put down less than a 5% deposit, the HLC vanishes. What’s more, the overall cost of a deal is reduced if you put down a smaller deposit.

On a two-year fixed-rate deal, the best headline rate for a £142,500 mortgage at 95% Loan-to-value (LTV) costs £26,296 over two years. By comparison, the best mortgage for a £144,000 mortgage at 96% LTV costs £25,206 over two years, which equates to a saving of £1,090. Significantly, 96% LTV borrowers make an immediate saving of £1,500 on top of that because they only have to put down a £6,000 deposit, instead of the £7,500 that 95% LTV borrowers are expected to cough up.

Crucially, if 96% LTV borrowers opt for a flexible mortgage, which enables them to make overpayments, they could put the extra £1,500 that they haven't used for their deposit to good use. Overpaying will reduce the overall outstanding loan after it has been arranged, cannily side-stepping the HLC.

Jane Baker, mortgage expert at Fool.co.uk, says: “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.”

David Kuo, Head of Personal Finance at Fool.co.uk, adds: “It seems that lenders have taken their eyes off the ball, and unwittingly created an opportunity for first-time buyers. It certainly makes a welcome change for borrowers to find the boot on the other foot, and they should make the most of it before lenders kick the door shut.”