Mortgage guarantee scheme extended into 2023 – but should you take out a deal with just a 5% deposit?
Homebuyers with small deposits will continue to have access to Government-backed support after its 'mortgage guarantee scheme' was extended this week for another year. But even with the difference in cost between mortgages for those with a 5% deposit and those with a 40% deposit at its narrowest in over 10 years, is it wise to take out a 95% deal? We explain your options below.
For guides and tools to help you get the best deal on your mortgage, see our Mortgages and Homes section.
Who can get a 95% 'guaranteed' mortgage
The mortgage guarantee scheme was launched in April 2021 to encourage lenders to offer more 95% deals – something many stopped doing during the coronavirus pandemic. The scheme was scheduled to end this month, but it's been extended until December 2023.
For homebuyers, there's little difference between a 95% mortgage offered through the guarantee scheme and a 95% deal offered outside of it. The key distinction is that the Government shoulders some of the financial risk of deals offered through the mortgage guarantee scheme. There are however some restrictions, including:
- The property you're buying / living in can't be worth more than £600,000.
- The property can't be a new-build.
- You'll need to apply for a capital repayment mortgage (so it can't be interest-only).
Like 95% mortgages offered outside of the scheme, these guarantee deals are available to first-time buyers, homemovers and remortgagers. You need a deposit worth between 5% and 9% of a property's purchase price to access them. For more details on exactly how the scheme works, see our Mortgage guarantee scheme guide. If you're in need of mortgage advice, seek out a broker by reading our Cheap mortgage finding guide.
How 95% mortgages compare with deals for those with bigger deposits
Generally speaking, mortgages tend to get much cheaper at certain loan-to-value thresholds (LTV – the proportion of the property's value you're borrowing as a mortgage). This difference is normally greatest at 90%, 80%, 75% and 60% LTV (see our How much I can borrow guide for more on the impact of LTV).
While this remains the case, the difference in cost between 95% and 60% mortgages is currently at its narrowest since around 2008, according to mortgage expert Ray Boulger of broker John Charcol.
For example, Halifax is currently offering a five-year fix at 4.5% for homebuyers with a 40% deposit and an equivalent rate of 5% for homebuyers with only a 5% deposit. On the wider market, the best five-year fixed rate for homebuyers at 60% LTV is currently 4.44%, while the best equivalent rate at 95% LTV is Halifax's 5% deal.
See the table below for a spread of the best mortgage rates available right now:
|Loan-to-value (LTV) (2)||2-year fix||5-year fix|
The risks that come with a 95% mortgage
While the premium for a 95% mortgage is smaller than usual right now, it doesn't detract from the fact that 95% mortgages are still more expensive – as shown in the table above. Currently, the top five-year fix at 90% LTV is 4.84%, for example, compared to 5% at 95% LTV – a difference of £840 over five years.
In addition, the number of deals available at 90% LTV is normally much larger than at 95% LTV. So if you're approaching the 90% band, it's worth considering if you're able to push to reach that threshold.
Another risk of taking out a 95% mortgage is that you're more likely to be impacted by negative equity – where the value of your property drops below the amount you owe on your mortgage. This can make it more difficult to sell your property. It can also impact your ability to remortgage, meaning you might end up on your lender's expensive standard variable rate (SVR) once your initial mortgage deal ends.
- Benchmark what type of rates are out there. Our Mortgage Comparison tool will help you see what's available currently and compare it against what you're paying now.
- Dig out the details of your current mortgage (if you have one). Such as... What's the rate? What type is it? When's the intro deal over? When must it all be repaid? Will you be penalised to switch deals? What's the loan-to-value (LTV)?
- If you've already got a mortgage, check out your existing lender's cheapest deal (product transfer). Use this rate as a benchmark to beat.
- If you've savings, use them to bag a cheaper deal. The more you can do to drop an LTV band, the cheaper your mortgage will be.
- Check out the size of any possible savings on our mortgage calculators. Stick your digits in here... Basic mortgage calculator – including what it'll cost | Compare two mortgages | Compare fixed-rate mortgages | 'How much can I borrow?' guesstimator.
- If you're thinking of applying, it's all about whether you'll be accepted. Lenders need to check if you're 'affordable' and whether you could meet repayments if rates shot up. So see our 17 ways to boost your mortgage chances, and don't forget to check your credit report for free. Then read up on how to improve your creditworthiness.
- If you're serious, speak to a broker – they're currently more important than ever. See our full help on how to find a good broker.