5% deposit mortgages are back: everything you need to know

The new government-backed mortgage scheme, which was first announced in the Budget and which helps people with 5% deposits get on the property ladder, is now officially available to lenders.

But which lenders will offer 5% deposit mortgages and who is eligible for them? We take a look.

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How does the 5% mortgage guarantee scheme work?

The mortgage guarantee scheme works by enabling buyers to secure a mortgage for a house worth up to £600,000 with just a 5% deposit.

For the average home buyer, the deposit for a 5% mortgage is around £15,400, according to a report by fintech company Thinkmoney.

Under the scheme, the government guarantees to repay a portion of the lender’s losses if you default on the loan.

Most lenders in the UK stopped offering 5% deposit mortgages early last year due to the pandemic. Lenders view 5% deposit mortgages as vulnerable to fluctuations in house prices that can lead to homeowners being in negative equity. Lenders have understandably seen them as risky options in these uncertain times.

The scheme has received a lot of praise. It gives those who have been unable to save a large deposit a chance to get on the property ladder.

Crawford Taylor, CEO and founder of fintech company Nude, which helps people save for their first home, summarises the scheme’s benefits: “Overall it’s positive. It helps people trapped at home with their parents or in rented accommodation get their own home by allowing lenders to more easily offer mortgages of 95% of the price of the home.

“This means buyers have a smaller amount to save (or invest) for (the other 5%), thus getting to move into their own place sooner. For our customers, this could be very soon, as we help supercharge the journey for that initial deposit.”

Who is offering 5% deposit mortgages?

The mortgage guarantee scheme has given lenders more confidence in offering 5% deposit mortgages, and many are now doing so.

Llyods, Santander, HSBC, Barclays, and NatWest are among the major lenders in the country that are already offering these mortgages.

Others have also stated that they will soon. Virgin Money, for example, is set to launch the scheme next month.

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Who can get a 5% deposit mortgage?

The 5% deposit mortgages are available to both first-time buyers and home movers.

Before you are approved for the loan, you will be subject to the usual lender affordability checks. So be prepared to answer questions and provide documentation showing your income and spending.

Different lenders may have different criteria for these mortgages. For example, some lenders are not offering a 5% deposit mortgage on new-build homes. So it’s a good idea to check with your lender.

It’s also worth noting that 5% deposit mortgages are not cheap. Rates on NatWest’s new 5% mortgages will begin at 3.9%. By comparison, the top mortgage rate for a 10% deposit is around 2.99%.

So, if you can, it might be worth stretching your deposit to 10% to score a lower interest rate.

As Crawford Taylor explains, “A larger deposit means lower mortgage costs, so for some, saving a larger deposit can still be a good thing.”

What other options are available for homebuyers?

If the 5% deposit mortgage route is not right for you, there are other options, including:

• Help to Buy: Equity Loan: a government loan that supports first-time buyers with a low-interest loan to add to their deposit.
• Shared ownership: a scheme that gives first-time buyers the option to buy a share of their home (between 25% and 75%) and pay rent on the remaining share.
• First homes: this new scheme, which is still in the works, aims to help local first-time buyers and key workers buy a home with a 30% discount against the market price.