First-time buyers with small deposits face mounting pressure as average mortgage rates rise and the prospect of a Bank of England base rate increase threatens to push repayments higher.

The average five-year fixed mortgage rate for borrowers with a 5% deposit has risen above 6%, reaching 6.07%, according to analysis by Moneyfactscompare.co.uk.

A borrower taking a £250,000 mortgage over 25 years with a 5% deposit would pay almost £600 more a year than somebody with a 10% deposit. The calculation is based on average five-year fixed rates of 6.07% at 95% loan-to-value and 5.75% at 90% loan-to-value.

The Moneyfacts average new mortgage rate has climbed from 5.47% at the start of July to 5.59%. It also remains well above the 4.90% recorded at the beginning of March.

Fixed and tracker rates have increased at several large high street banks as lenders respond to volatile swap rates amid prolonged tensions in the Middle East. Santander and HSBC raised rates this week, following similar increases by Lloyds Bank last week.

Mortgage pricing can change independently of the Bank of England base rate, but any increase in the official rate would add further pressure. Moneyfacts calculated that a rise of 0.25 percentage points would increase repayments by about £450 a year on a typical £250,000 mortgage over 25 years, while a 0.50 percentage point increase would add about £900.

The calculations are based on an average five-year fixed rate of 5.66% across the market and all loan-to-value tiers.

Borrowers whose fixed deals are ending may still reduce their costs by avoiding a lender’s revert rate. The average standard variable rate stands at 7.13%, compared with its record of 8.19% in November and December 2023.

Rachel Springall, spokesperson at Moneyfactscompare.co.uk, said: “Interest rates are expected to stay higher for longer and those who delay locking into a fixed rate mortgage could pay the price. The cost of living is expected to worsen in the coming months which puts pressure on the Monetary Policy Committee (MPC) at the Bank of England to consider a rate increase.

“Despite fixed rates rising in recent weeks due to swap rate volatility, it is still worth moving off an expensive revert rate to a fixed deal, as borrowers could save around £2,800 a year moving onto a five-year fixed rate.

“A base rate tracker mortgage might look appealing due to the slightly lower rates currently on sale, but even these have seen rates rise over the past couple of weeks, and if BBR rises, these borrowers will immediately be hit by higher repayments.”

Springall added: “Locking into a longer-term fixed deal for more peace of mind could shield borrowers from future rate rises. An interest rate rise of 0.25% would increase repayments to around £450 a year, and a 0.50% rise would result in a rise of around £900, based on the average five-year fixed rate of 5.66%, on a typical mortgage of £250,000 over 25 years.

“This demonstrates how indecisiveness can cost borrowers who don’t secure a fixed deal. This will also worry new buyers who have a small deposit, as the average five-year fixed mortgage rate at 95% loan-to-value recently rose above 6%, now at 6.07%.”

She said: “First-time buyers who can save a 10% will not only have more purchasing power, but they will also widen the choice of cheaper mortgage rates. Those who borrow £250,000 over 25 years will pay £600 less on their mortgage per year, compared to the average rate available to borrowers with a 5% deposit, on a five-year fixed deal.

“However, borrowers may not even be able to stretch their savings to a 5% deposit, due to the lack of affordable housing. In fact, over recent months, lenders have worked hard to launch deals designed for first-time buyers, such as the 98% loan-to-value options available from lenders like Leeds Building Society and Santander, or those that only require a small deposit of £5,000, such as Yorkshire Building Society and Lloyds Bank.

“Seeking advice from a broker is essential to navigate the mortgage maze and understand lending criteria, particularly how much someone can borrow based on their salary and the fact that higher loan-to-value options can exclude new build properties. Borrowers who apply direct for a loan could face disappointment without good guidance.”