First-time buyers who have saved only a small deposit could pay lower mortgage bills than those who have a larger lump sum at their disposal.

Thanks to a strange anomaly in mortgage lending rules, borrowers who scrape together a 4 per cent deposit can end up paying less over the term of their mortgage deal than someone who saves 5 per cent, according to Motley Fool, the financial website.

This will be welcome news for struggling first-time buyers who have resigned themselves to saving for years to get on the housing ladder. The average cost of a first home is £168,770, so those who save a deposit of 4 per cent instead of 5 per cent would have an extra £1,687 in their pockets on average.

The reason for the deposit anomaly is that some lenders impose higher-lending charges (HLCs) on mortgages worth between 90 per cent and 95 per cent of a property’s value. But lenders who offer mortgages for 96 per cent or more of the value of a property do not apply HLCs, because the deals are usually targeted at first-time buyers.

HLCs were invented by lenders as a way to cover the cost of the risk of a borrower defaulting on repayments. For instance, a Bank of Scotland borrower with a £150,000 mortgage at 95 per cent loan to value (LTV) will have to pay an HLC of £2,250.

The benefit of saving a deposit of 5 per cent or more is that lenders offer lower interest rates. But in many cases the HLCs are so steep, at between 2 per cent and 3 per cent of the total cost, the benefit of the lower rate can be cancelled out.

Jane Baker, of Fool.co.uk, says: “It is possible to put down a smaller deposit and still pay less. This goes against the grain as, intuitively, it makes sense to pay the largest deposit you can manage.”

For instance, a first-time buyer who has a £7,500 deposit on a property costing £150,000 will be able to obtain a low two-year fixed rate at 4.99 per cent from Chelsea Building Society. Once the HLC is added, the total cost of the loan over two years is £26,296.

A borrower in a similar position with a deposit of only £6,000 will have to pay a higher rate of interest. He or she can clinch a two-year deal at 6.6 per cent from Standard Life Bank. But because there is no HLC, the borrower would be £1,000 better off because the total cost of the loan over two years is £25,206.

One way around paying HLCs is to choose a lender that does not apply the fees. These include Bradford & Bingley, Cheltenham & Gloucester, Cooperative Bank, Nationwide and Woolwich.

James Cotton, of London & Country, the mortgage broker, says: “All the best two-year fixes at the moment go up to 95 per cent but charge HLCs above 90 per cent. HLCs are more crippling than stamp duty for some borrowers. Because of the size of these fees, it is usually better value for the borrower to take a higher rate without the HLCs.”

A borrower with a 10 per cent deposit is rarely better off in terms of the interest than one who saves 50 per cent, although monthly repayments will be lower because the loan is smaller. For instance, a best-buy two-year fixed rate of 5.45 per cent from Newcastle Building Society, with a £599 fee, is available up to an LTV of 95 per cent, so borrowers with a 5 per cent deposit will receive the same interest rate as those who have 50 per cent to put down.

However, it must be noted that HLCs apply only to borrowers who have deposits of between 5 per cent and 10 per cent of a property’s value. Deposits that are smaller or larger than this are not usually affected, so anyone with a deposit for more than 10 per cent will be better off all round because the rates are lower and there are no HLCs to pay.

Mr Cotton says: “Getting together a deposit of 10 per cent or more can still be worthwhile because it means that you have the pick of the deals, without having to avoid those that charge HLCs.”

The message is to do your sums on the true cost of a loan and not to look at the interest rate alone.

Melanie Bien, of Savills Private Finance, another broker, says: “This research shows just how important it is to work out the total cost of a mortgage – the rate plus all fees and charges – when comparing one deal with another. The important thing to be aware of is that some lenders do charge an HLC. It is vital that you are on your guard for this, whether you have a deposit or not, and choose a lender that does not impose this unfair and punitive fee.”

To compare the market’s best fixed, variable and offset mortgage deals, go to timesonline.co.uk/mortgage

CASE STUDY: £1,600 charge avoided

Jennifer Batty paid a 5 per cent deposit on her first home in Leeds but made a £1,608 saving on her 6.25 per cent two-year fixed-rate deal because her lender, Bristol & West, did not impose a higher-lending charge.

The 29-year-old charity worker’s mother gave her £4,000 towards a deposit of £4,860. She says that without the help with the deposit, saving that amount would have taken years. Miss Batty, right, says: “I would have loved to have put together a bigger deposit. I would not have been able to afford any worthwhile down payment without my mum’s help and I chose a deal without higher-lending charges to reduce the upfront costs.”

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