Since April 2021, borrowers with a 5% deposit can buy a home once more after then chancellor Rishi Sunak unveiled the government’s new 95% mortgage guarantee scheme in the March budget.
What is the scheme?
Nervous about the impact of the health crisis on house prices and the jobs market, lenders ditched their 5% deposit deals when the pandemic struck.
To entice them back, the government has launched a 95% mortgage guarantee scheme similar to the Help to Buy scheme that ran between 2013 and 2016.
To use the scheme, lenders must pay a fee, and in return, the government promises to compensate them for a substantial amount of any losses they suffer if a home is repossessed.
How does it work?
It works in the same way as an ordinary mortgage.
As long as you can pass the lender’s credit check and affordability assessment, you will need to hand over at least 5% of your savings and the bank will give you a mortgage for the rest.
First-time buyers are expected to be the main users of the scheme. Owning a home for the first time can be stressful enough without the worry that your mortgage payment will rise in a couple of years.
To give buyers peace of mind, the government has insisted participating lenders offer five-year fixed rate mortgage deals as part of their range.
Finder survey: Do Brits feel they really know how mortgages work?
Response
Male
Female
Somewhat agree
34.78%
29.97%
Neither agree nor disagree
25%
25.15%
Somewhat disagree
12.23%
18.37%
Strongly disagree
11.68%
17.92%
Strongly agree
16.3%
8.58%
Source: Finder survey by Censuswide of 1032 Brits, December 2023
Who is eligible to take part?
Anyone with a deposit of between 5% and 9% of the purchase price can apply.
Terms and conditions attached to the government’s guarantee restrict who can use the loans and what type of deal you’ll be granted.
First-time buyers and existing homeowners can apply for the 5% deposit mortgages.
You can buy a new-build or second-hand home as long as it’s your main home. Buy-to-lets and second homes are not allowed. Interest-only mortgages are also excluded.
The purchase price of your home can’t be more than £600,000, and you must be creditworthy to apply.
Although as yet there aren’t any guidelines on exactly what being creditworthy means, if you’ve had serious credit slip-ups in the last six years, you’re unlikely to be accepted.
You need to be able to pass the bank’s affordability assessment, too.
Although a lot more 95% mortgages are hitting the shelves, it doesn’t mean you can pick any property you like and put down as little as a 5% deposit – you’ll need a salary big enough to support a mortgage debt worth 95% of the value of your home.
Banks calculate the maximum loan they’re prepared to offer you in lots of different ways and an income multiplier is one of them. If you earn £40,000 a year, your mortgage lender might offer you a loan that’s 4 times the size of your annual salary. In that case, you’d be offered a mortgage of £160,000. After putting in your 5% deposit, you could buy a property worth £168,420. If you’re buying with someone else, you can combine your salaries to borrow more.
Most lenders have mortgage calculators on their websites that will give you a rough indication of what you can borrow. Or you can ask a mortgage broker to find out for you.
Which mortgage lenders are taking part?
The UK’s biggest banks, Lloyds, NatWest, Barclays,HSBC and Santander, all rolled out their new 5% deposit ranges on the day the scheme went live (19 April 2021). Virgin Money is planning to launch its deals in May.
Can lenders offer 5% deposit mortgages outside the scheme?
Yes, in fact, that’s the government’s objective. With commitment from the big mortgage players, the smaller banks and building societies who are not part of the scheme have felt comfortable enough to launch their own 5% mortgages without the fear of being overwhelmed by demand.
Help to Buy: Equity Loan is only open to first-time buyers buying new-build homes. You need at least a 5% deposit and can take out a loan from the government of up to 20% of the purchase price.
After five years, you start paying interest on the Help to Buy loan and when you sell your house, if you took the full 20% equity loan, the amount you give back to the government is equal to 20% of your sale price.
Shared ownership
If you don’t have a huge deposit, you can buy a share of a home from a housing association and pay rent on the remaining portion.
You might buy a 25% share, for example, and then pay rent on the remaining 75% share.
You can take out a mortgage of up to 95% of the share you’re buying, leaving you to put down the remaining 5%. The government’s Help to Buy shared ownership website provides details on who is eligible to apply. Learn more about shared ownership.
Save a bigger deposit
If you’re not in a rush to buy a house, a mortgage broker would always advise to try and save a 10% deposit at least. That way you’ll get a cheaper interest rate and you’re at less risk of falling into negative equity.
Pros and cons of a 5% deposit mortgage
Pros
You can get on the property ladder sooner if your savings only stretch to a 5% deposit
Cons
Lenders’ credit scores are higher for 95% mortgages, so you need a good credit rating to get one.
If the value of your house falls, you could end up in negative equity. That’s when your house is worth less than your mortgage debt. But don’t panic, it’s only a problem if you want to sell before your house price has recovered.
Remortgaging is a no-go while you’re in negative equity. If you need a new mortgage deal, speak to your current bank. They often have special arrangements for their existing borrowers.
Bottom line
Saving for a house is tough, particularly if you live in an expensive part of the country, so 5% deposit mortgages will be a lifeline for lots of buyers.
Getting one might be harder than you think though. By speaking to a mortgage broker, or by researching the different lenders, you can find out if your current salary is enough to support a 95% deal or if you need to save for a bigger deposit.
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Samantha Partington is a freelance trade and national consumer journalist writing about property and personal finance. Previously she worked for the Daily Mail, Property Week and Mortgage Solutions. Before becoming a journalist, Samantha worked as a mortgage broker and latterly for a mortgage, bridging and secured loan lender. See full bio
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