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.
Can you get a mortgage with a 5% deposit?
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.
What’s the 5% deposit mortgage government 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).
Who can benefit from the 5% deposit scheme?
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.
How to get a 5% deposit mortgage
To qualify for a 5% deposit mortgage, you’ll need to fit these criteria:
- You’re buying a main residential property. The 95% mortgage scheme can’t be used for buy-to-let or second homes.
- Your deposit is 5% to 9% of the value of the property. That means your LTV will be 91% to 95%.
- The property you’re buying is under £600,000. 95% mortgages won’t cover properties above that.
- You fit the lender’s standard mortgage eligibility criteria. What that criteria is will be different for different lenders. But it will likely include:
- Proof you’re a British citizen or have UK residency status
- Enough income to cover the mortgage repayments
- A good credit score. Find out all about your credit score here.
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.
Should I get a 5% deposit mortgage?
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:
- They make it easier to buy property for the first time. This is the main draw of small deposit mortgages, whether they’re government-backed or not. For lots of first-time buyers, 5% deposit mortgages mean being able to buy sooner, or being able to buy period.
- There’s less saving involved. With a smaller deposit, you’ll need to spend less time saving up for your deposit. That means you won’t have to wait as long to move into your new home.
- They’re probably more expensive in the long run. Generally, the lower the LTV, the cheaper the mortgage over the full length of the deal – with or without government backing. 5% deposit mortgages will likely have much higher interest rates than mortgages with larger deposits.
- Your choice of deals will be more limited. While the government’s small deposit scheme is still being ramped up, the choices are limited. So far, lenders have to offer a 5-year fixed term deal – other options haven’t been announced yet.
- There’s a higher risk that you might go into negative equity. Negative equity is when your property is worth less than the mortgage you still owe. It’s usually caused by falling house prices – and it’s a bigger risk with smaller deposits, simply because you have less equity (the percent of the property you own) from the get-go.
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.
Where can I get a small deposit mortgage?
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.