Can I buy any home?

It is understood the loans will be available to those buying any property under the value of £600,000 – unlike the Help to Buy scheme which is limited to new builds. Nearly nine out of ten properties currently on the market fit into this price bracket, according to Rightmove.

Nationwide, one of the UK’s largest building societies, has said the average price paid by a first-time buyer in 2020 was £256,057, up 10 per cent from the previous year. Based on this national average, a typical five per cent deposit would be £12,803. Of course, the figure will be higher in more expensive property areas like London and the South East.

How will the scheme work?

For the buyer, the new 95 per cent scheme will work as any standard mortgage. But for the mortgage lender, the scheme guarantees that the Government will bear some of the cost if the borrower fails to keep up with mortgage payments, the property is repossessed and the subsequent resale fails to pay off the outstanding debt. Any lender taking part in the scheme will have to offer a five-year fixed mortgage as part of their range of 95 per cent mortgage deals. This is to provide options for buyers with small deposits who want the security and predictability of a mortgage with a rate fixed over a longer term.

The initiative starts in April 2021 and runs until December 2022. Several of the UK’s biggest mortgage lenders have already signed up for the scheme, including Natwest, Lloyds, Santander and HSBC. Other banks and building societies are expected to follow.

Who is eligible to apply?

The scheme is open to first-time buyers and home movers across the UK.

The eligibility criteria include:

• You will need to be buying a property to live in yourself. These mortgages can’t be used for second homes or buy-to-let properties. Both new and existing properties are eligible priced up to £600,000.
• You will have to pass standard affordability checks, including credit assessment score.
• You will have to apply for a capital repayment, not an interest-only mortgage.

Why did the Government get involved?

Raising a deposit is among the biggest barriers to getting onto the property ladder.  Since the start of the COVID-19 pandemic in March 2020, low-deposit mortgages have “virtually disappeared”, according to the Treasury. Many lenders scrapped riskier 95 per cent mortgage deals amid fears over how the crisis would affect jobs and the wider economy.  The government’s new scheme aims to encourage lenders to start offering low deposit mortgages again.

Will mortgage repayments be more expensive?

Lenders have yet to publish details on what interest rates they will be offering with these 95 per cent mortgages. The picture will become clearer as they begin to launch their deals. However, the mortgage repayments will almost certainly be higher than with 10 per cent deposit mortgages.

In general, the more deposit you pay up front, the lower the rate of interest on your mortgage. Mortgages typically become cheaper at 90 per cent, 80 per cent, 75 per cent and 60 per cent loan to value (LTV). If you can save for a 10 per cent deposit or more, it will give you access to a cheaper rate, which will save you money.

So, while the new five per cent mortgage is likely to help would-be buyers who struggle to save for a larger deposit, the mortgage repayments will be higher.

How much do I need to earn?

Nationwide has said the national average asking price for first-time buyer was £256,057. Currently, most mortgage lenders will only let you borrow 4.5 times your annual salary. This means to qualify for a 95 per cent mortgage you will need to earn around £54,056. The average salary in the UK is around £30,800 which make this a challenge for those wanting to buy alone while more feasible for a couple.  

The new five per cent mortgage scheme work best for individuals or couples who struggle to save for a larger deposit but can afford mortgage payments relatively easily. It may also suit those in regions where house prices are lower and more in line with wages than in London and the south-east.

What if house prices fall?

When buying a property with small deposit, there is a risk that you could fall into negative equity if house prices fall. This is when the borrower ends up owing more money than their property is worth. Negative equity is one of the reasons why building societies are reluctant to lend to people with smaller deposits. This risk should be carefully considered by anyone taking out one of the new five per cent deposit mortgage schemes.

What the experts say

Claire Chambers, of Chambers Estate Agency, in Birmingham hailed the five per cent deposit mortgage guarantee scheme as a “great idea.” She said: “A lot of aspiring first-time buyers rent a property with their partners. With rental prices being relatively high that makes it difficult to save for a larger deposit.

“In my view, it will make help more people to get a foot on the housing ladder if they can get a mortgage with a five per cent deposit rather than saving for a 10 to 15 per cent deposit.”

What about the higher interest rates for low deposit mortgages? “Overall, the rates are going to be higher, but you have to pay less upfront. It is not usually the monthly payments that are a problem for first time buyers but finding the deposit. We find mortgage payments are often less than the rent for a like-for-like property.”

Chris Knapman, founder of the Mortgage Guy in Plymouth, also warmly welcomed the small deposit scheme as widening access to home ownership.  He said: “It is incredibly helpful, massively so. A lot of people struggle to get a 10 to 15 per cent deposit.”

Low deposit mortgages are typically expensive with rates of about 3.5 to 4 per cent. He said: “They can’t offer the 95 per cent mortgage at 4.5 per cent. That would be crazy, nobody would take them up.

“My gut feeling is the 95 per cent mortgage guarantee deals will come in with rates of about 3.5 to 4 per cent. This could help rates drop a bit for the 90 per cent deals.”