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Everything you need to know about 5% Deposit Mortgages.

home cut out showing low deposit

Last month Chancellor Rishi Sunak announced a new mortgage scheme to help home buyers with a 5% deposit, get a mortgage, with the Government backing part of the loan.

With this scheme, lenders will be able to offer more deals, and buyers with a deposit as little as 5% will be able to get on the property ladder – inline with the government’s goal of turning ‘generation rent’ into ‘generation buy’. The scheme is however not just limited to first time buyers but is available to anyone buying a main residential home for up to £600,000.

The scheme will run from April 2021 until December 2022. 

Mortgages with a 95% loan to value (i.e., a 5% deposit) had virtually disappeared since the advent of the pandemic. The introduction of a mortgage guarantee scheme with deposits of just 5%, will ensure the housing market remains active for the foreseeable future.

Who is eligible?

Here is a simple five-point criterion to check if you are eligible:

  1. Anyone buying a main residential home is eligible (the scheme is NOT limited to first time buyers).
  2. The property must be under the value of £600,000.
  3. You must have a deposit equivalent to at least 5% of the property’s purchase price. 
  4. You cannot apply for an interest only mortgage, it must be a regular capital repayment mortgage.
  5. You must pass the lender’s standard affordability criteria.

Basically, anybody buying a main home, first time buyers, previous homeowners and home movers are eligible to apply for such a mortgage. You must pass the lender’s affordability criteria. This is critical because a lower deposit means you are taking a bigger mortgage. You must prove that you will be able to afford the repayments.

How does it work?

As far as the buyer is concerned, this will just operate like a standard mortgage.

For the mortgage lender, however, the scheme guarantees that the Government would cover some of the cost if the lender lost money (i.e., in a situation where the property was repossessed and unable to recoup the outstanding mortgage amount).

The scheme is quite similar to the 5% Help to Buy mortgage scheme of 2013 – 2017.

Participating lenders must offer a five-year fixed mortgage as part of their range of 95% LTV products.

Is it for me?

Whether you should go for a mortgage via this scheme depends on your individual circumstances. Generally, with any mortgage below 10% deposit, the interest rates would be higher – so if you can stretch to a 10% deposit, that will get you a better rate. However, if you are in a situation where you can afford a higher monthly payment but do not have a large deposit, then this scheme may help get you the home you want.

Get in touch with us to discuss details and see if this is scheme is right for you.

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