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Are you considering a 5% deposit mortgage? Thanks to the 95% Mortgage Guarantee incentive scheme, we have seen big lenders return to the market with their low deposit mortgages in hand. 

It might all be sounding too good to be true? One month on from the budget announcement, we're diving into how these mortgages work and what are the restrictions. 

Here's everything we know about 5% deposit mortgages so far:

  • Under the scheme, first-time buyers, home movers, and previous homeowners with a 5% deposit will be allowed to apply for a 95% loan-to-value mortgage (meaning the loan is for 95% of the property's value, hence the 5% deposit). 

Restrictions on who can apply for a 95% Mortgage include: 

  1. 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.

  2. The property must be worth £600,000 or less.

  3. You must have a deposit equivalent to between 5% and 9% of the property's purchase price

  4. You must apply for a capital repayment mortgage. This means that you won't be able to apply for an interest-only mortgage.

  5. You'll need to pass a lender's normal mortgage affordability criteria.
    'Lenders are generally only considering customers with pristine credit records, and only offering up to 4.49 times the annual income of a borrower', according to Chris Sykes, a mortgage consultant at Private Finance.

  6. At the moment, lenders won't offer 95% mortgages on new-build properties, flats, or to anyone on furlough

What else do we know about the 5% deposit mortgages?

  • The 95% mortgages will be no different from any other standard mortgage would for you, as the buyer. There will be no difference between a 95% mortgage offered through this scheme and a 95% mortgage offered outside this scheme. According to MoneySavingExpert, 'These low deposit mortgages should not be seen as special mortgages per se, rather they are simply one option for those struggling to get onto the housing ladder.'

  • The 'Scheme' side of things is actually for the lender and launched as an incentive for them to return the 95% mortgage products to the market. The scheme guarantees that the Government will shoulder some of the cost if the lender lost money, lowering the risk for the lender. Eg, if the borrower had failed to keep up with mortgage payments and the property was repossessed, but the subsequent property sale did not replace the outstanding mortgage amount. That's why we're seeing a rush of these products hitting the market! 

  • The scheme opened this month and will run until December 2022 - lots of time to gather that deposit together! According to Halifax, there are now 15 cities in the UK where you can buy a house with a deposit until £10,000 thanks to the return of 5% mortgage deposits!

  • The 95% mortgage deals also require borrowers to fix their mortgage for a minimum of five years, with early repayment charges if they have to leave the mortgage early for any reason.

  • Whether a low deposit mortgage is right for you will depend on your individual circumstances. Remember, the rates tend to be MUCH higher if you've got less than 10% deposit so if you can push for a 10% deposit then you'll get access to a cheaper mortgage (and cheaper monthly repayments). Mortgages typically become cheaper at 90%, 80%, 75% and 60% LTV. 

  • Big lenders such as Lloyds, Natwest, Santander, Barclays and HSBC will offer these mortgages from April, with Virgin Money expected to follow suit shortly. You Mortgage Broker will search the most up-to-date lending market to find your best mortgage deal. 

What we know about 95% mortgage rates currently on the market (so far*), research from This is Money. Interest rates on the 5% deposit mortgages are averaging around the 4% mark. 

  1. Coventry is currently offering the lowest rate of interest at 3.89% over five years. It has a £999 fee, which you can either choose to add to the loan or pay upfront. For example; Taking out a £200,000 mortgage over a 25-year term, and including the fee in the loan, a borrower could expect to pay £1,049 a month.

  2. Accord, is offering the next best rate of interest at 3.99% with a £995 fee, meaning a borrower under the same circumstances could expect to pay £1,059 a month.

When searching for the best mortgage deal for you, speaking to a mortgage broker could help benefit you, they have all the knowledge and connections already, they will be able to advise on what type of mortgage is best for your situation.

Your broker will be able to point out if these mortgages are expensive, and will likely ask you if you're able to supply a larger deposit to bring the cost of the mortgage down.

If you're ready to start your mortgage journey, create an account with Mortgage Propeller today, and select your mortgage broker! (Soon-to-be mortgage bestie.)

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