5% Mortgages

A new mortgage scheme to enable lenders to offer more deals or homebuyers with a low deposit or limited equity has been announced in the Budget. The Chancellor Rishi Sunak unveiled details of the scheme, which is designed to help those with a 5% deposit get accepted for a mortgage with the Government backing part of the loan.

How will the scheme work?

Under the scheme, first-time buyers, home movers and previous homeowners with a 5% deposit will once again have access to 95% Loan to Value (LTV) mortgages (meaning the loan is for 95% of the property’s value).

• The 95% LTV mortgage will operate as any standard mortgage would for you, the buyer. As far as you are concerned, there will be no difference between a 95% mortgage offered through this scheme and a 95% mortgage offered outside this scheme.
• For the mortgage lender however, the scheme guarantees that the Government will shoulder some of the cost if the lender lost money. Eg, if the borrower had failed to keep up with mortgage payments and the property was repossessed, but the subsequent property sale did not recoup the outstanding mortgage amount.

The Government would cover 95% of any losses a lender made on the amount of the mortgage above 80% loan-to-value. Eg, on a £100k property with a 95% mortgage, the lender would not have a Government guarantee on the first £80k, but the Government would then guarantee 95% of the remaining £15k).

• The scheme will open April 2021 and run until December 2022. 

The scheme is similar to the 5% Help to Buy Government-backed mortgage scheme, which operated between 2013 and 2017. Any lender that is taking part in the scheme will have to offer a five-year fixed mortgage as part of their range of 95% LTV products.

Since the onset of coronavirus, 95% mortgages have all but disappeared from the market – leaving many potential homeowners stranded. This scheme is therefore designed to encourage more lenders to re-enter the 95% market.

Which buyers can take part in the scheme?

Any buyer with a small deposit can get one of these Government-backed mortgages. They are NOT restricted to first-time buyers, but can be used by anybody buying a main home, including previous homeowners and homemovers.

In brief, here is the eligibility criteria:

• You must be buying a main residential home in the UK. So these mortgages can’t be used for second homes or buy-to-let properties.
• The property must be worth £600,000 or less. You won’t be able to apply if the property costs in excess of this.
• You must have a deposit equivalent to between 5% and 9% of the property’s purchase price. That means you’ll have a mortgage LTV between 91% and 95%.
• You must apply for a capital repayment mortgage. This means that you won’t be able to apply for an interest-only mortgage.

You’ll need to pass a lender’s normal mortgage affordability criteria.