Following a difficult year of lockdown with Covid restrictions, the government has recently announced a new measure to help buyers get on the property ladder. In this post we will discuss what the new 5% deposit mortgage is, and what the benefits are for first time buyers.
What is the 5% deposit mortgage scheme?
Until recently, you couldn’t get a 95% mortgage. Lenders would not lend 95% of a property’s value, thus requiring only a 5% deposit. In a bid to stimulate the housing market and make it more affordable for first-time buyers, the government stepped in and offered a scheme designed to reduce the risk to the lenders in offering a 95% loan to value product.
The scheme does not protect the entire 95% however, so the lenders still have some exposure to defaulting clients. The government will guarantee 95% of the value above 80%. Confused? So on a property valued at £100,000, the lender will not be ‘covered’ for the first £80,000. Your 5% deposit would be £5,000, so the remaining, in this case is £15,000. The government is offering protection for 95% of the £15,000. It essentially gives lenders more confidence to offer a 95% product.
This is great news for first time buyers as it means taking off the pressure of saving up such a large deposit, a struggle well known! In a time when housing demand has soared and now over 80% of private renters are saving for a mortgage, it is the perfect time for this scheme to come into play and offer first time buyers with more support on securing a mortgage.
Previously, unless you were using the help to buy schemes such as equity loan or shared ownership, home buyers needed to save up a minimum of 10% for a deposit, with some mortgage lenders requiring up to 20%. Depending where you are buying even for a small house or flat this could mean 10s of thousands of pounds.
What is the eligibility of this scheme?
Like all help to buy schemes, there are several restrictions you need to be aware of to be eligible for the 5% deposit mortgage.
- Value of the property mustn’t exceed 600k
- This mortgage doesn’t apply to new build properties.
- It needs to be your main home in the UK – so you can’t use this mortgage for a 2nd home, holiday home or buy-to-let property.
- You still need to pass the lender’s usual affordability checks.
- You need to apply for a repayment mortgage – interest only mortgages aren’t applicable in this situation.
How do you get this 5% deposit mortgage?
Many of the major banks and lenders are now offering this scheme including Lloyds, NatWest, Royal Bank of Scotland and Santander. If you go elsewhere make sure you check, they are taking part in this help to buy scheme.
What are the benefits to first time buyers for this mortgage?
The biggest benefit is that first time buyers need not save up as much money to get onto the property ladder. This now means for a £300,000 property, instead of saving up £30,000+ you only need to save up £15,000. This makes it much easier for you or I to take the first step onto the property ladder.
The other benefit is that, unlike other help to buy schemes whereby you own a percentage of the house. With this, the house is 100% yours and you are not restricted to new builds, meaning in some cases you have more flexibility with the property of your choice.
What should you think about first?
Before you go straight to the bank and apply for that 5% deposit mortgage, check how much you have saved. If you have more than 5% and closer to a 10% deposit you may be better off going for a standard mortgage.
This 5% deposit mortgage is great for those who don’t have 10% of the house’s value but it does mean interest rates are higher for this first-time buyer mortgage. So, if you can put down a bigger deposit, you are likely to be offered a better interest rate, meaning potentially lower monthly repayments.
With all the above if you are looking for further mortgage or financial advice on such matters we can help. Whether you are looking for the best mortgage rates for that holiday home, looking into equity release, or you’re a first time buyer, we can provide non-biased independence advice and support.
Contact us today to find out how we can help you with your next home purchase.
Please note your home may be repossessed if you do not keep up repayments on your mortgage