Danger lurks for first-time buyers

If recent reports are to be believed, first-time buyers are entering the housing market in droves. Applications for mortgages by first-timers, which had made up less than 10 per cent of applications for most of 2005, rose to 20 per cent in December, according to the broker My Mortgage Direct. Likewise, Mortgages Direct, the financial subsidiary of estate agents Spicerhaart, also reported an annual high of first-time buyers in the same month.

A number of lenders, keen to attract the business of first-time buyers, have launched a deluge of mortgage products aimed at this lucrative market over the past few years. But are these just a gimmick? Some let you off the cost of an application fee or offer cashback. But moneysupermarket.com, the product comparison website, says you could be throwing away more than £300 by going for a first-time buyer deal instead of a more widely available loan. It assessed the difference by calculating the cost of mortgages with interest rates fixed for three years and equivalent to 95 per cent of a £170,000 property.

The cost of the loan over three years would be £35,381 on the Co-op's first-time buyer deal at 4.84 per cent, but £35,028 with the Alliance & Leicester on its standard three-year fix at 5.54 per cent - a saving of £353 over the period. Moneysupermarket points out that the Alliance & Leicester deal works out cheaper because it has a cashback element - useful for a first-time buyer needing to furnish their home.

Melanie Bien, associate director at independent broker Savills Private Finance, suggests you 'think creatively'. For example, if you are attracted to a first-time buyer deal because you can't afford the fees on standard mortgages, consider adding them to the loan. Most lenders will allow this, although you will pay interest on the fee.

The biggest supposed benefit of first-time buyer mortgages is that they may allow you to take out a loan with a smaller deposit. But borrowing 100 per cent of the value of your property - or even 97 per cent - rather than putting down the normal 5 per cent deposit can cost you thousands in just a few years.

Moneysupermarket points out that a couple buying a £150,000 property looking for a repayment tracker mortgage over a 25-year term could opt for a 100 per cent tracker with the Royal Bank of Scotland at 5.25 per cent, avoid putting down a deposit and pay £926 a month. Or they could pay a 3 per cent deposit - £4,500 - and take out a first-time buyer two-year tracker with Abbey at 4.74 per cent and pay £847 a month. Putting down 5 per cent - £7,500 - they could take out a two-year tracker with the Co-op at 4.54 per cent and pay £798 a month.

The message is clear: save, beg or borrow for a bigger deposit and you will have more to spend on furniture and entertaining friends in your new home.