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Bumper mortgages are back as low deposit loans hit highest level since the credit crunch 

Help to buy
A mortgage offered with a 5pc deposit under the Help to Buy scheme, which offers government funding to buy new build properties Credit: Matt Cardy/Getty Images

Homebuyers are stepping onto the housing ladder with ever-smaller deposits as the bumper mortgages popular in the years before the credit crunch regain a bigger foothold in the market.

Just over one in 20 new mortgages was given to a borrower with a loan worth between 90pc and 95pc of the value of their home, meaning they put down deposits of between just 5pc and 10pc.

This is the largest proportion since mid-2008, at the start of the financial crisis, according to the Bank of England.

“Demand is very weak at present so this is very much about lenders trying to expand their lending in the face of very weak demand,” said Hansen Lu at Capital Economics.

“They are offering very aggressive interest rates to try to get more people to take their mortgages.”

Almost four in 10 borrowers have deposits of less than 25pc of the value of their property, which is also a share last recorded 11 years ago.

These big loans became more popular in the boom years before the financial crisis, but mortgages with deposits of 10pc or less all but disappeared when the crash struck, plunging from almost 15pc of the market in 2007 to less than 2pc two years later.

The burgeoning popularity of small-deposit lending comes at a time of high property prices, pushing borrowers to take more from the bank, and ultra-low interest rates that make the repayments on large loans more affordable.

A record 92pc of all new borrowers opted to fix their interest rate, locking in low rates for several years.

The average fix came with an interest rate of 2.22pc - close to the record lows of 2017 and just over a third of the level of mortgage costs in 2008.

This is in part caused by low interest rates on global markets and from central banks, but also reflects banks’ efforts to cut costs and become more efficient as fierce competition for borrowers forces them to offer better deals.

Despite the rise of low-deposit borrowers, there are signs that these loans are not as risky as those offered before the financial crisis.

Fewer than 1pc of homebuyers bought property with a deposit of less than 5pc, indicating the loans most closely associated with the excesses of the pre-crisis years are not making a comeback.

In addition, the quality of borrowers has improved. Barely one in every 200 new mortgage borrowers has an impaired credit history now, compared with one in 30 in 2007.

Less than 1pc of all mortgages are in arrears, compared to more than 2pc in 2007 and in excess of 3pc at the height of the crisis in 2009.

“On the whole most borrowers have quite a lot of equity. For some new borrowers there could be some degree of concern, but the proportions are still relatively small,” said Mr Lu.