5% Deposit Mortgages
What is a 5% deposit mortgage?
A 5% deposit mortgage is designed for people who only have a relatively small amount of money but want to get on, or move up, the housing ladder.
In previous years, low deposit mortgages where common, and there were a large number of lenders offering these types of mortgage products.
As a result of the pandemic the availability of low deposit mortgages has greatly reduced. In recent months lenders have slowly restarted lending to people with a 10% deposit, but options for those with a 5% deposit have remained very limited.
Thankfully, both the Scottish and UK Governments have taken steps to address this by introducing schemes which will increase the availability of low deposit mortgages.
From 1st April 2021, the Scottish Government will reintroduce The First Home Fund following on from a highly successful pilot in 2020. The First Home Fund is a £200 million shared equity pilot scheme to provide first-time buyers with up to £25,000 to help them buy a property that meets their needs.
It is open to all first-time buyers in Scotland with a 5% deposit (saved or gifted) and can be used to help buy both new build and existing properties. The funding provided by the scheme will help over 8,000 first-time buyers purchase their first home.
At the same time, the UK Government will launch their Mortgage Guarantee Scheme, which will run until 31 December 2022, giving those interested in using the scheme 20 months in which to apply for a mortgage.
Under the mortgage guarantee scheme, those looking to buy a property with a 5% deposit will be able to apply for a 95% loan-to-value (LTV) mortgage deal with participating lenders. The scheme is available on properties costing a maximum of £600,000 and is open to both First Time Buyers and those looking to move home too.
Both of these schemes are open to those looking to buy a new home or a pre-existing (second hand) home.
What’s the Catch?
These mortgages generally have higher interest rates than mortgages that require larger deposits. This is because there is more risk for the lender.
As you’ve only put down a small deposit they have a smaller margin for house prices to fall before your house – the security that they can reclaim if you fail to repay – is worth less than you owe the bank.
What About Negative Equity?
No-one can predict with any certainty what is going to happen to house prices in the next few years.
When buying a home with a small deposit, there is a risk that you could fall into negative equity if prices do decline. This is when house prices fall and the borrower ends up owing more money than their house is now worth. This becomes a problem if you want to sell or remortgage, and is one of the reasons why lenders are hesitant to offer mortgages to those with small deposits.
It is a risk that anyone taking out one of the new five per cent deposit mortgages will need to consider carefully.
How do I apply?
Both of these schemes are aimed at helping creditworthy households who are struggling to save for the higher mortgage deposits required by lenders in the current environment.
If you have a good credit record*, a steady income, and you are looking to purchase your home with a 5% deposit then please contact us today for a free, no-obligation chat to see how we can help you.
*A good credit record is generally viewed as no missed payments on your debts in the last 12 months, and no Defaults, CCJs, or Insolvency in the last 6 years. If you are unsure of your credit history, we recommend using CheckMyFile as they provide the only report that covers all four credit agencies in the UK.