Small deposit mortgages: 95% mortgages
Full details on the Government scheme incl who's eligible
A new mortgage scheme to enable lenders to offer more deals or homebuyers with a low deposit or limited equity has been announced in the Budget. The Chancellor Rishi Sunak unveiled details of the scheme, which is designed to help those with a 5% deposit get accepted for a mortgage with the Government backing part of the loan.
How will the scheme work?
Under the scheme, first-time buyers, home movers and previous homeowners with a 5% deposit will once again have access to 95% loan-to-value mortgages (meaning the loan is for 95% of the property's value).
- The 95% mortgage will operate as any standard mortgage would for you, the buyer. As far as you are concerned, there will be no difference between a 95% mortgage offered through this scheme and a 95% mortgage offered outside this scheme.
- For the mortgage lender however, the scheme guarantees that the Government will shoulder some of the cost if the lender lost money. Eg, if the borrower had failed to keep up with mortgage payments and the property was repossessed, but the subsequent property sale did not recoup the outstanding mortgage amount.
(To be geeky, the Government would cover 95% of any losses a lender made on the amount of the mortgage above 80% loan-to-value. Eg, on a £100k property with a 95% mortgage, the lender would not have a Government guarantee on the first £80k, but the Government would then guarantee 95% of the remaining £15k).
- The scheme will open next month and run until December 2022.
The scheme is similar to the 5% Help to Buy Government-backed mortgage scheme, which operated between 2013 and 2017. Any lender that is taking part in the scheme will have to offer a five-year fixed mortgage as part of their range of 95% LTV products.
Since the onset of coronavirus, 95% mortgages have all but disappeared from the market – leaving many potential homeowners stranded. This scheme is therefore designed to encourage more lenders to re-enter the 95% market.
Which buyers can take part in the scheme?
Any buyer with a small deposit can get one of these Government-backed mortgages. They are NOT restricted to first-time buyers, but can be used by anybody buying a main home, including previous homeowners and homemovers.
In brief, here is the eligibility criteria:
- 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.
- The property must be worth £600,000 or less. You won't be able to apply if the property costs in excess of this.
- You must have a deposit equivalent to between 5% and 9% of the property's purchase price. That means you'll have a mortgage LTV between 91% and 95%.
- You must apply for a capital repayment mortgage. This means that you won't be able to apply for an interest-only mortgage.
- You'll need to pass a lender's normal mortgage affordability criteria. Read more about what this criteria is in our First-time buyers guide.
What kind of mortgage rate can I get?
Details about what kind of mortgage rates you can get with these 95% mortgages are yet to be published. Remember, the lower your LTV, the better rate you're likely to get so these mortgages are unlikely to be cheap.
We'll update this guide as soon as we know more.
Are these mortgages any good?
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. Another option to consider if you've only got a small deposit is the Help to Buy Equity Loan.
Ultimately, this new Government-backed scheme was launched with the intention of encouraging lenders to start offering 95% mortgages again – something many were already offering before the coronavirus pandemic but have not been since.
There’s no advantage for a homebuyer to take out a 5% deposit mortgage via this scheme over a normal 5% deposit mortgage, so simply look at which is better for you. However, once lenders are starting to launch 5% deposit mortgages via this scheme, it's likely there will be more normal 5% deposit mortgages, giving you more choice.
Whether a low deposit mortgage is right for you though 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. Mortgages typically become cheaper at 90%, 80%, 75% and 60% LTV.
If you're between 18-39, a Lifetime ISA (LISA) could help you save towards a more substantial deposit. A LISA lets you save up to £4,000 a year towards your first home or retirement, and gives you a cash bonus of up to £1,000 a year on top. Full lowdown on how it works in our LISA guide.
Which lenders will be offering these mortgages and how do I get one?
If getting a 95% mortgage is right for you, several of the UK's biggest mortgage lenders have already signed up to take part in the scheme:
- Lloyds, Natwest, Santander, Barclays and HSBC will offer these mortgages from April.
- Other lenders are expected to follow, including Virgin Money. We'll update this section when we know more.
Always best to use a broker
Details haven't been published yet about how to apply for these mortgages, but it's expected that the process will be the same as it is for any standard mortgage. When searching for the best mortgage deal for you, it's always advisable to speak to a mortgage broker about what type of mortgage is best for your situation.
And, of course, the 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.
First-time buyer? We've lots more guides, tools & tips to help...
- Cheap mortgage finding. How to find top deals for you and mortgage brokers.
- First-Time Buyers' Guide. Free PDF helps you take your first step on to the property ladder.
- Help to Buy Equity Loan. Full guide on how the scheme works, and who can apply.
We've also got some handy mortgage calculators...
- Compare fixed-rate mortgages. This compares two fixed-rate deals, breaking down the cost per month.
- Basic mortgage calculator. Shows the cost per month and the total cost over the life of a mortgage, incl fees & interest.
- Offset mortgage vs savings. Use this calculator to work out if an offset mortgage works out better for you.
Clever ways to calculate your finances