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First-time buyers take advantage of legal home loan loophole

20 November 2007
First-time buyers could actually end up paying more for their mortgage when they scrape together a five per cent deposit than when they put down just four per cent, according to According to the finance website, first-time buyers who put down a four per cent deposit can avoid Higher Lending Charges (HLCs), while those who put down a more substantial deposit face higher costs.

Head of personal finance, David Kuo, says: “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.”

Mortgage lenders launched HLCs to protect themselves from losses in the event of defaulted repayments. However, the HLC costs are complicated to work out so many buyers do not include them when comparing mortgage deals. In general, those borrowing more than 90 per cent of the property value must pay HLCs, which work out as approximately 1.6 per cent of the value of the mortgage.

However, home loans accounting for 96 per cent to 100 per cent do not incur HLCs. Therefore, those paying less than five per cent are exempt from paying the charge and the overall cost of the deal is lower.

According to, the best headline rate for a £142,500 mortgage at 95 per cent loan-to-value (LTV) costs £26,296 on a two-year fixed-rate deal, while the best mortgage for a £144,000 mortgage at 96 per cent LTV costs just £25,206 over two years, incurring a saving of £1,090.

Moreover, the 96 per cent LTV borrowers save an additional £1,500 as they only have to find a £6,000 deposit compared with the £7,500 that 95 per cent LTV borrowers have to put down. If the 96 per cent LTV borrower chooses a flexible loan allowing them to make overpayments, this £1,500 could be used to reduce the overall outstanding loan after it has been arranged.

Mortgage expert at Jane Baker 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.”

Find out more about first-time home buyer mortgages and 100 per cent mortgages for first-time buyers

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