One of the many impacts of the coronavirus pandemic was a shortage of low deposit mortgages – with many lenders withdrawing their high loan-to-value products from the market.
As well as the availability of mortgages for buyers with just a 5% deposit, many lenders also pulled their 90% loans as well – leaving low deposit buyers with very few options.
Now, though, 95% mortgages are making something of a comeback thanks to a new mortgage guarantee scheme launched by the government.
Here, we’ll answer all your questions about how 5% deposit mortgages work and what the mortgage guarantee scheme means for you as a buyer…
What is a 5% deposit mortgage?
A 5% deposit mortgage means you put down an amount of money worth 5% of your property’s purchase price and a mortgage covers the remaining 95%. For example, if you’re buying a property for £200,000, you would put down £10,000 as a deposit and the other £190,000 would be covered by a 95% mortgage.
Can I get a mortgage with a 5% deposit right now?
Mortgages for buyers with a 5% deposit were hard to come by during the summer of 2020 after the pandemic saw most lenders withdraw their low deposit mortgages from the market.
However, in the spring 2021 Budget, the government gave first-time buyers and those with low deposits a boost by introducing a mortgage guarantee scheme to encourage lenders to bring back 95% mortgages.
What is the 95% mortgage guarantee?
The 95% mortgage guarantee scheme is designed to encourage lenders to offer more mortgages to those buyers with lower deposits.
With uncertainty surrounding jobs and income due to the pandemic, many lenders stopped offering 95% mortgages.
The mortgage guarantee scheme sees the government cover a portion of your lender’s losses should you be unable to pay your mortgage and your property is repossessed.
How does a 5% deposit mortgage work?
A 95% mortgage under the mortgage guarantee scheme is no different to any other 95% mortgage for buyers.
The scheme is in place to provide a level of protection for lenders who may otherwise be reluctant to offer mortgages to low deposit buyers.
Buyers themselves will still go through their lender’s affordability and income assessments before receiving a mortgage offer.
How long is the 95% mortgage guarantee scheme available for?
The mortgage guarantee scheme is open now and will run until December 2022.
This should provide plenty of time for lenders to assess whether or not they wish to be part of the scheme and also adequate time for buyers to explore the 95% mortgage options available.
What banks are offering 5% deposit mortgages under the scheme?
A number of large lenders have already agreed to offer 5% deposit mortgages under the guarantee scheme, including:
• Lloyds Bank
• NatWest Bank
• Barclays Bank
Who is eligible for the 95% mortgage guarantee scheme?
The mortgages on offer through the guarantee scheme are available to both first-time buyers and existing homeowners.
To be eligible for a 95% mortgage under the scheme, you must also:
• Be buying a main residence – the mortgages can’t be used for those buying second homes or buy-to-let properties
• Be buying a property worth no more than £600,000
• Have a deposit of between 5% and 9% of your property’s purchase price
• Be applying for a repayment mortgage
• Be able to meet your lender’s affordability criteria
What kind of mortgages are available with a 5% deposit?
Lenders taking part in the mortgage guarantee scheme must offer at least one five-year fixed rate product for buyers.
This helps give low-deposit buyers some security that their mortgage repayments won’t change for at least five years.
On top of fixed rate mortgages, lenders may also offer other types of mortgage products under the scheme.
Tracker mortgages ‘track’ above the Bank of England’s base interest rate, so if the base rate goes up, your mortgage interest rate also rises by the same amount, meaning your repayments will be higher.
If the base rate goes down, your interest rate goes down, too, and your repayments will be lower.
Discount rate mortgages
Discount rate mortgages offer rates that are slightly less than the lender’s own Standard Variable Rate (SVR).
So, if your discount mortgage is at 2% and the lender’s SVR is 5%, your mortgage rate will be 3%.
Like tracker mortgages, if the lender increases or decreases its SVR, your mortgage interest rate will increase or decrease with it, meaning your payments may go up or down.
What other options do I have with a 5% deposit?
Another option for buyers with a 5% deposit is the Help to Buy equity loan scheme.
Equity loans are available covering 20% of a property’s purchase price (40% in London), with buyers putting forward a 5% deposit and the remaining 75% (55% in London) is covered with a Help to Buy mortgage.
The equity loans are only available to first-time buyers, however.
More information on Help to Buy equity loans is available in our comprehensive guide.
If you’re a first-time buyer exploring the mortgage market for the first time, our guide to home loans can help.
We’ve also outlined everything you need to know about the spring 2021 property market here.