- April 5, 2021
- Posted by: James Black
- Category: PFG Mortgages
Everything you need to know about 5% Deposit Mortgages.
Last month Chancellor Rishi Sunak announced a new mortgage scheme to help home buyers with a 5% deposit, get a mortgage, with the Government backing part of the loan.
With this scheme, lenders will be able to offer more deals, and buyers with a deposit as little as 5% will be able to get on the property ladder – inline with the government’s goal of turning ‘generation rent’ into ‘generation buy’. The scheme is however not just limited to first time buyers but is available to anyone buying a main residential home for up to £600,000.
The scheme will run from April 2021 until December 2022.
Mortgages with a 95% loan to value (i.e., a 5% deposit) had virtually disappeared since the advent of the pandemic. The introduction of a mortgage guarantee scheme with deposits of just 5%, will ensure the housing market remains active for the foreseeable future.
Who is eligible?
Here is a simple five-point criterion to check if you are eligible:
1. Anyone buying a main residential home is eligible (the scheme is NOT limited to first time buyers).
2. The property must be under the value of £600,000.
3. You must have a deposit equivalent to at least 5% of the property’s purchase price.
4. You cannot apply for an interest only mortgage, it must be a regular capital repayment mortgage.
5. You must pass the lender’s standard affordability criteria.
Basically, anybody buying a main home, first time buyers, previous homeowners and home movers are eligible to apply for such a mortgage. You must pass the lender’s affordability criteria. This is critical because a lower deposit means you are taking a bigger mortgage. You must prove that you will be able to afford the repayments.
How does it work?
As far as the buyer is concerned, this will just operate like a standard mortgage.
For the mortgage lender, however, the scheme guarantees that the Government would cover some of the cost if the lender lost money (i.e., in a situation where the property was repossessed and unable to recoup the outstanding mortgage amount).
The scheme is quite similar to the 5% Help to Buy mortgage scheme of 2013 – 2017.
Participating lenders must offer a five-year fixed mortgage as part of their range of 95% LTV products.
Is it for me?
Whether you should go for a mortgage via this scheme depends on your individual circumstances. Generally, with any mortgage below 10% deposit, the interest rates would be higher – so if you can stretch to a 10% deposit, that will get you a better rate. However, if you are in a situation where you can afford a higher monthly payment but do not have a large deposit, then this scheme may help get you the home you want.