Good news: Small deposit buyers are on the up

Good news: Small deposit buyers are on the up

The number of buyers with small deposits is on the rise, according to new research. Tepilo explains why this is good news for first-time buyers.

One of the main barriers for first-time buyers across the country is the size of the deposit needed to secure that dream first home. With this in mind, would-be buyers will be pleased to hear that the number of people purchasing properties with small deposits is on the rise, with trends at the start of 2017 boding well for those getting on to the property ladder for the first time.

The latest research from residential chartered surveyors’ firm e.surv has revealed that buyers with a small deposit accounted for 21.4% (or just over a fifth) of the mortgage market in March 2017.

It was the third consecutive month for growth in the small deposit buyers’ market, with the proportion of buyers with smaller loans getting deposits rising steadily since December last year. In December, small deposit buyers made up 16.1% of the market, increasing to 18.7% in January and then 20.5% in February. That pattern of increases continued into March, with small deposit buyers now making up a sizeable chunk of the total market.   

The overall size of the mortgage market, however, reduced in size in March compared with the previous month and the same stage in 2016. In March 2017 there were 64,695 loans approved (seasonally adjusted), compared to 66,911 in February, a fall of 5.3%. The March figure was also some 7.7% lower than March 2016.

In most cases small deposit buyers are first-time buyers, so it’s promising to see this market grow. The difficulties faced by first-time buyers in recent years have been widely documented – as such, the growing strength of small deposit buyers in the mortgage market will give hope to this demographic in particular.

As well as various government schemes to encourage buyers onto the ladder with small deposits, first-time buyers have also been helped by changes to the buy-to-let market – including the recently introduced phasing out of mortgage interest tax relief and the extra 3% stamp duty surcharge implemented in April 2016 – which has increased the amount of available stock for first-time buyers to battle for.

The growing trend for small deposit buyers began at the end of last year and has picked up speed in 2017, buoyed by government initiatives and record low mortgage rates across the board.

A property market that is geared towards first-time buyers is also one that can have benefits for all, with new buyers helping to start chains and allowing second, third and fourth-steppers to move up the property ladder. For a properly functioning property market, activity needs to be taking place and buyer and seller sentiment both need to be positive. If first-time buyers are more confident about their chances of buying, this has a knock-on effect for the market as a whole.

While there has been a move away from larger deposits, the survey found that this kind of borrower still outstrips smaller deposit buyers by a significant margin. The proportion of large deposit buyers was below 35% for the second successive month in March, but they still made up 34.4% of the market, considerably higher than the small deposit segment. Defined as buyers with a 60% deposit or more, the number of large deposit borrowers was fractionally down in March from the 34.7% ratio witnessed in February, representing an underlying shift away from this segment of the market.

Meanwhile, small deposit buyers continue to rise both in total number and as a proportion of the market. In March, 13,845 small deposit buyers were granted loans, up from 13,717 in February.

It’s true that borrowers with the biggest deposits are always likely to dominate the mortgage market, as lenders see these buyers as lower risk and will usually lend to these buyers above any other, but that doesn’t mean that lenders aren’t also targeting other parts of the market. With mortgage rates so low and competition so strong, many lenders know that in order to compete they have to cater to the burgeoning small deposits/first-time buyer market. Borrowers with small deposits are the beneficiaries of this, with finance available to them that might not have been there even six months ago.

Regionally speaking, small deposit buyers are at their most prevalent in the North West and Yorkshire, the only two regions where more loans were approved for small deposit buyers than larger ones.

The proportion of small deposit buyers in the North West, for example, was 31.7%, compared to 23.1% for borrowers with larger deposits. Small deposit buyers also dominated in Yorkshire, where 30.9% of the market was accounted for by buyers with smaller pots of cash in comparison to 23.8% for those with larger deposits.

Northern Ireland and the Midlands were two other regions that had significant proportions of small deposit buyers in March, with 26.1% and 27.3% of the market respectively.

It’s a whole different ball game in wealthy, cash-rich London, though, where large deposit buyers dominate. Only 13.6% of buyers in the capital had a small deposit – the lowest number of any region. However, on the upside, this did increase from 12.8% in February, suggesting a very slight shift in priorities in London too.

Some 41.9% of buyers in the capital had a big deposit, but this did fall slightly in March, down from 43% in February.

Scotland, the South East, the South, South Wales, Northern Ireland and Eastern England were other regions that were dominated by borrowers with large deposits.

If you’re a first-time buyer, the North West and Yorkshire represent the best places to get onto the property ladder. London, unsurprisingly, is the toughest place for those buying for the first time.

Either way, the situation for those with smaller deposits is more promising than it has been for some time, which will give hope to those who had started to give up on their home ownership dream altogether.