Budget Breakdown: Can you get amortgage with a 5% deposit? By Mortgage Advisor Samantha Borge

In the Budget the Government announced their plan to encourage the return of the 95%  mortgage. This has now started to be implemented and a number of the big lending names have recently launched 95% mortgages with the backing of the government scheme. 

How does the scheme work?

The mortgage guarantee scheme, launched on 19th April 2021, involves the government ‘guaranteeing’ 95% mortgages for buyers with a 5% deposit. The scheme is designed to encourage banks to start offering 95% mortgages again, after nearly every single one was withdrawn during the Covid-19 pandemic.

Under the scheme, the government guarantees the portion of the mortgage above 80% of the property value – known as loan to value - so, with a 95% mortgage, 15% is guaranteed by the government (the difference between 95% and 80%). In reality it means that the government will partially compensate the lender if a homeowner fails to pay their mortgage. The guarantee takes place in the background and isn’t even visible to the borrower.

Why has the government launched this scheme?  

Low deposit mortgages are deemed high risk. The bigger the percentage of deposit made by the borrower the greater the “risk share”. Lenders take comfort from the fact that both sides are putting a chunk of their money at risk.

Until March 2020, 5% deposit mortgages were fairly commonplace. As soon as the Covid-19 pandemic hit the number of low deposit mortgages available plummeted almost overnight. In just under a year, the number of 95% mortgages available to first-time buyers fell from 391 to just three*, as lenders moved quickly away from riskier lending. 

The new scheme aims to give banks the confidence to offer 95% mortgages again by taking some of the risk.

Who is eligible? 

The mortgage guarantee scheme is available to first-time buyers and home movers across the UK. It’s only available for “residential” properties – a property you are buying to live in yourself (second homes and buy to let properties are excluded). Loans are available up to £500,000 on a repayment basis (not interest-only). Lender affordability checks are conducted, including a loan-to-income test and credit score assessment. Some lenders have highlighted “capped loan to income” and “enhanced credit scoring” meaning that criteria is tighter for these mortgages, which does seem fair when we are talking about the high risk category, but may be disappointing news for some.

The scheme will initially run until 31 December 2022, though this will be reviewed before the end date.

Which lenders offer mortgages under the scheme? 

Major banks including HSBC, Lloyds (including Halifax), NatWest, Barclays and Santander have already launched 95% deals. Under the terms of the scheme, participating lenders need to offer a five-year fixed-rate mortgage as part of their range. The government says this will give borrowers the security of predictable repayments for a longer period

Interest rates on 90% mortgages are currently considerably higher than they were before the start of the pandemic, and the pattern will continue. The higher the loan to value, the higher the risk, the higher the interest rates that will be charge. While we are enjoying record low interest rates, don’t expect to see rock bottom rates on 95% mortgages.

Getting 5% deposit mortgages back on the market is a step towards helping open up the property market to more people; however, it is not the answer to everyone’s home buying dreams. There are restrictions, some lenders are still using relatively low income to loan multiples, which means they will apply a cap on the borrowing multiple, which in some cases won’t stack up to a house purchase with just a 5% deposit.

*Source:Which Money

Mortgage disclaimer: Your home may be repossessed if you do not keep up repayments on your mortgage.

Samantha has given great mortgage advise for lots of single parents within SPW. See more of what Sam Borge does and how to contact her on Linked In