5% deposit mortgages: a quick guide
What’s a 5% deposit mortgage? And should you get one? Here’s everything you need to know about 95% mortgages.
Last updated on
Oct 23, 2024 14:30
A 5% deposit mortgage is a type of mortgage deal where you only pay 5% of the total value of the property as a deposit.
Typically, lenders ask for a larger deposit, which tends to start around the 10% mark. However, not everyone who wants to buy a home can afford to save that much. That’s why the UK government launched an initiative to encourage banks to offer mortgages for first-time buyers with smaller deposits.
Here, we’ll run through everything you need to know about 5% deposit mortgages and the government scheme that can help you get one.
Important to note: 5% deposit mortgages are sometimes referred to as 95% mortgages. That’s because if you pay 5% as a deposit, you need to borrow 95% to make up the value of the property.
Yes! It is possible to get a mortgage with a 5% deposit. That said, it’s often a little trickier to get a small deposit mortgage than if you had more cash saved. That’s because the smaller your deposit, the more of the value of the property you’ll have to borrow.
This is where your loan-to-value (LTV) ratio comes into play. If you’ve got a 5% deposit, you’ll have a 95% LTV mortgage. With a 20% deposit, you’ll have an 80% LTV.
The lower your LTV, the less you need to borrow, and the lower your interest payments will be, which makes your monthly repayments more affordable. But, the higher the LTV, the more you need to borrow, which, to lenders, is a bigger risk.
During the height of the pandemic, banks were reluctant to take on that risk, which is why they stopped offering higher LTV (or small deposit) mortgages almost entirely.
This prompted the UK Government to launch a new scheme in the spring of 2021, encouraging lenders to offer 5% deposit mortgages again. Here’s what you need to know about the mortgage guarantee scheme.
The purpose of the UK government’s 5% deposit mortgage scheme is to get lenders to offer 95% LTV mortgages again. It kicked off in April 2021, meaning 5% deposit mortgages are back on the table.
How does the 5% deposit scheme work? For you, it’s the same as any other mortgage. You’ll just have to pay a 5% deposit instead of a larger one, and you’ll make your repayments as normal.
The scheme works on the lenders’ side of things: the government guarantees part of the loan. That means the government will cover the costs if the homeowner defaults (in other words, can’t keep up with their monthly repayments).
The scheme is meant to help more people get onto the property ladder for the first time.
But technically, anyone looking to buy a home in the UK can benefit from this scheme. You don’t necessarily need to be a first-time buyer.
To qualify for a 5% deposit mortgage, you’ll need to fit these criteria:
Heads up: Lenders tend to cap the amount they lend to about 4.5 times your income. So, if you’re on the median UK annual salary of £31,400, you’ll be able to borrow a maximum of about £141,300.
Small deposit mortgages are a great way to get your first foot on the property ladder, but they’re not for everyone. Here are the pros and cons:
For example: Let’s say you bought a house worth £250,000 with a 5% deposit of £12,500. Your mortgage would be £237,500. If the value of your property dropped below £237,500, you’d be in negative equity. This can make it tricky to sell or remortgage – unless you have the savings to make up the difference.
Before you go for a 5% deposit mortgage, it’s worth thinking carefully about the big picture. If you’re able to save for a larger deposit (a 10% or 20% sum), you’ll likely have access to lower interest rates, meaning you’ll pay less for your property in the long run.
A handful of UK lenders have already said they’ll offer 5% deposit mortgages, starting in April. These include NatWest, HSBC, Barclays, and Lloyds. More are expected to follow.
With our mortgage comparison tool, you can find the small deposit mortgages that are available right now. As a mortgage broker with access to 20,000 mortgage deals from over 90 lenders, we make finding the best mortgage deal for you fast and simple.
We look at the timescale of the homebuying journey, from property search to getting your keys. Here’s how long it takes to buy a house.
Wondering if you can get a mortgage? Find out what most lenders want to see before applying for your first (or next) mortgage.
Looking for the lowdown on 95% mortgages? Look no further. Here, we’ve got all you need – from pros and cons to the scheme that can help you get one.
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