Banks are offering younger borrowers cheaper mortgages while raising rates for everyone else in what could be the first sign of a rate war for small deposit buyers.
While home loans have become more expensive in recent months, interest rates for borrowers with small deposits have been reduced by banks eager to attract new homeowners in a Black Friday-style deals bonanza.
Lenders have become less cautious about taking on these borrowers, brokers said, leading to the reduction in rates. Competition between lenders is currently higher than at any point since before the pandemic, with thousands of deals available.
This will especially be the case over the coming month as lenders try to bring in more business before the end of the year amid a slowing housing market, experts said. Borrowers with small deposits who need larger mortgages, typically at higher rates, are more lucrative for lenders.
Aaron Strutt, of mortgage broker Trinity Financial, said: “The market tends to slow down the closer we get to Christmas, and lenders want to keep it moving, especially for first-time buyers, who are the lifeblood of the market. The best way to do that is to lower prices.
“Until the Bank of England puts Bank Rate up, it is likely rates for small deposit borrowers will continue to drop.”
The average two-year fixed rate for borrowers with a 5pc deposit has fallen by 0.08 percentage points since the start of the month, according to Moneyfacts, an analyst. The average 10pc deposit mortgage fixed for two years is 0.06 percentage points lower.
Some lenders have made larger changes. Halifax cut rates for borrowers with a 10pc deposit by 0.15 percentage points. This would save £2,858 on a £200,000 mortgage over 25 years.
The bank also reduced its five-year deals for borrowers with 15pc, 10pc and 5pc deposits by 0.25 percentage points.
During the early days of the Covid pandemic, the number of deals for borrowers with smaller deposits shrank dramatically as lenders grew concerned over the health of the economy.
For much of last year there were no widely available deals for borrowers with a 5pc deposit, before Government initiatives to help first-time buyers were introduced.
The banks that did offer low deposit mortgages were inundated with applications, leading them to put up rates to deter interest.