5% deposit mortgages - how they work
Caz Blake-Symes • March 4, 2021
Full details on the Government scheme and who is eligible
A new mortgage scheme for homebuyers with a low deposit has been announced in the Budget. The Chancellor Rishi Sunak unveiled details of the scheme, which is designed to help those with a 5% deposit get accepted for a mortgage with the Government backing part of the loan.
How will the scheme work?
Under the scheme, first-time buyers, home movers and previous homeowners with a 5% deposit will once again have access to 95% loan-to-value mortgages (meaning the loan is for 95% of the property's value).
- The 95% mortgage will operate as any standard mortgage would for you, the buyer.
- For the mortgage lender however, the scheme guarantees that the Government will shoulder some of the cost if the lender lost money. Eg, if the borrower had failed to keep up with mortgage payments and the property was repossessed, but the subsequent property sale did not recoup the outstanding mortgage amount.
- The scheme will open next month and run until December 2022.
The scheme is similar to the 5% Help to Buy Government-backed mortgage scheme, which operated between 2013 and 2017. Any lender that is taking part in the scheme will have to offer a five-year fixed mortgage as part of their range of 95% LTV products.
Since the onset of coronavirus, 95% mortgages have all but disappeared from the market – leaving many potential homeowners stranded. This scheme is therefore designed to encourage more lenders to re-enter the 95% market.
Which buyers can take part in the scheme?
Any buyer with a small deposit can get one of these Government-backed mortgages. They are NOT restricted to first-time buyers but can be used by anybody buying a main home, including previous homeowners and home movers. In brief, here is the eligibility criteria:
• You must be buying a main residential home in the UK. So, these mortgages can't be used for second homes or buy-to-let properties.
• The property must be worth £600,000 or less. You will not be able to apply if the property costs in excess of this.
• You must have a deposit equivalent to between 5% and 9% of the property's purchase price. That means you will have a mortgage LTV between 91% and 95%.
• You must apply for a capital repayment mortgage. This means that you will not be able to apply for an interest-only mortgage.
• You will need to pass a lender's normal mortgage affordability criteria.
Which lenders will be offering these mortgages and how do I get one?
Several of the UK's biggest mortgage lenders have already signed up to take part in the scheme from April. These include:
• Lloyds, NatWest, Santander, Barclays and HSBC.
• Other lenders are expected to follow, including Virgin Money. We will be working with all lenders as this offer develops
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