This is because the higher lending charge vanishes for borrowers putting down less than 5 per cent as a deposit.
Typically, people who borrow over 90 per cent of the property value pay HLCs, which cost around 1.6 per cent of the home loan. But bizarrely, lenders who offer mortgages between 96 per cent and 100 per cent don’t impose a HLC.
This leaves an void which sees those putting down a deposit of between 5 per cent and 9.9 per cent stumping up the cash to pay an HLC.
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 per cent LTV costs £26,296 over two years (according to fool.co.uk data).
By comparison, the best mortgage for a £144,000 mortgage at 96 per cent LTV costs £25,206 over two years, which equates to a saving of £1,090. Significantly, 96 per cent 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 per cent LTV borrowers are expected to cough up.
Crucially, if 96 per cent 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.
David Kuo, head of personal finance at Fool.co.uk, said: “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.”
