If you’re struggling to come up with the standard 10% deposit for your first or next
home sweet home, I’ve got some good news for you.
In April 2021, the government launched a new 95% mortgage scheme, to help you buy a new
home with a deposit of just 5% of the property’s value.
Even so, not just anyone can rock up with some cash and secure their dream home, so
in this video I’ll take you through what you need to know about the scheme, who’s
eligible and the pros and cons.
Take a look.
What is the mortgage guarantee scheme?
Most lenders require you to have a deposit of at least 10% of the property’s value
before they’ll give you a mortgage for the remaining 90%.
In theory, the larger the deposit you can pay upfront the less risk you pose to the
lender and the lower the interest rates are for you, meaning lower monthly repayments.
For a lot of people, though, saving 10% is a struggle akin to cooking an appropriate
portion of pasta!
And that’s where the government’s new 5% deposit mortgage scheme comes into play.
The scheme isn’t exactly the first of its kind, but a lot of lenders ditched their 5%
deposit deals when the pandemic hit.
Lenders have to pay a fee to use the scheme but in return, the government has agreed to
act as a guarantor, promising to compensate them for any substantial losses they suffer
if a home gets repossessed.
How does the scheme work?
It works much in the same way as a normal mortgage.
You’ll need to pass your lender’s credit check and affordability assessment, after
which you’ll need to stump up 5% of the property’s value and your bank will give
you a mortgage for the rest.
The property has to be your main residential home and worth no more than £600,000.
The government has also chucked in another lifeline in the form of a fixed-rate mortgage
deal for the first five years, so you won’t have to worry about your mortgage repayments
suddenly going through the roof for half a decade.
Many of the UK’s biggest lenders like Lloyds, NatWest, HSBC and Santander are all taking
part in the scheme.
And many smaller lenders are also starting to launch their own 5% deposit mortgages outside
of the official scheme, so shop around for a lender that suits you.
Who is eligible?
To be eligible for this scheme you need to hit the following 6 criteria:
1.
Have a deposit between 5% and 9% of the property purchase price.
2.
Earn a salary big enough to support a mortgage debt worth 95% of the value of your home.
Most lenders will have mortgage calculators on their websites that’ll give you a rough
indication as to how much you can borrow.
3.
Be creditworthy.
At the moment there aren’t exact guidelines on what this means, however, if you’ve had
any serious credit slip-ups like defaults in the last six years, it’s unlikely you’ll
be accepted.
4.
Be able to pass your bank’s affordability assessment.
5.
The scheme is open to both first-time buyers and existing homeowners...
6. who can take their pick of new-build or previously-owned homes valued at £600,000
or less.
Buy-to-lets, second homes and interest-only mortgages are all excluded from the scheme.
Pros and cons
PROS * With only a 5% deposit required, the top
pro is that you can get on the property ladder sooner.
* You’ll also get a fixed-rate mortgage for the first five years in your new home.
CONS * Despite the low deposit, you’ll still
need a salary big enough to support the remaining 95% mortgage.
* Typically, lenders’ want a good credit score to give you a 95% mortgage, so many
people won’t qualify.
* In theory, the bigger your deposit the lower your risk to lenders, which could qualify
you for lower interest rates on your mortgage.
* Greater risk of negative equity.
Negative equity is when you owe more on your mortgage than the value of the property, for
example, if the price of your house falls.
When you’ve only put up 5% of your home’s value as a starting point, you’re at more
risk of this happening.
The more you pay off and the more you’re willing to wait for the markets to shift,
your risk should decrease.
* Remortgaging is a no-go while you’re in negative equity.
And even if you’re not in negative equity, with such a small amount of invested in the
property, you might miss out on more competitive remortgage rates.
What next?
For more information on the 5% deposit mortgage scheme visit finder.com.
Or if you don’t think this scheme is quite the right one for you, check out our guides
on the government’s Help To Buy and shared ownership schemes.
Links to all those pages on Finder can be found in the description below.
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