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High street lenders bring back 5% deposit mortgages as new scheme launches

Vicky Shaw, PA Personal Finance Correspondent
·4-min read

High street giants returned to ultra-low deposit mortgage lending on Monday, in a boost to borrowers who have found themselves “shut out” of the property market over the past year.

Halifax, Lloyds Bank, HSBC UK, Barclays and NatWest were among those launching 5% deposit deals for first-time buyers and existing home owners under the UK Government’s new mortgage guarantee scheme.

Santander will offer three new mortgages under the scheme on Tuesday. Virgin Money will follow next month.

Katie Brain, a banking expert at financial information business Defaqto said: “When the pandemic started, all the mortgage deals for first-time buyers and those with small deposits just disappeared.

“Many who had saved hard for a deposit found themselves unable to get finance and were effectively shut out from the property market.

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“Although there have been a few products that been briefly available during the pandemic, this is the first time that we have seen mainstream lenders in the high LTV (loan-to-value) market in nearly a year.”

Borrowers will still need to pass affordability checks.

They will also need to check individual lenders’ policies to find out more about whether they could be eligible, with several lenders setting out exclusions for new-build homes on Monday.

Some lenders also specified that self-employed customers will be able to apply for their deals.

Aspiring home owners may also want to compare what is on offer under the scheme with the low deposit deals that are available outside it.

Finance experts highlighted a five-year deal from Coventry Building Society at 3.89% with a £999 fee, which is not in the mortgage guarantee scheme.

Defaqto said that, within the scheme, NatWest’s offering of a two-year deal at 3.90% with no fee, and its five-year deal at 4.04% without a fee, are particularly competitive.

The number of low deposit mortgages on the market shrank dramatically in the early days of the coronavirus pandemic, as lenders became much more cautious in the tough economy.

The new scheme will tackle this by helping borrowers to secure a mortgage with just a 5% deposit to buy a house for up to £600,000.

It will work by enabling lenders to purchase a Government guarantee that would compensate them for a portion of their losses in the event of a repossession.

The guarantee will be valid for up to seven years after the mortgage is originated.

Eleanor Williams, a finance expert at Moneyfacts.co.uk said: “Seeking independent and qualified advice may be a wise step for first-time buyers who have a 5% deposit.

“The best mortgage for their circumstances will come down to more than just the rate alone, and when considering a product it’s important to take into account the overall, true cost of the whole deal.

“This means balancing costs such as any fees, with any possible incentive packages the borrower may benefit from, against the initial rate.

“Having the up-to-date knowledge and support of an adviser who can consider both products that are in the mortgage guarantee scheme and those outside of it, may be invaluable in securing the option which works for them and their plans.”

Some experts also suggested borrowers could be better off by trying to stretch to a bigger deposit.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “While rates on 95% products are looking more competitive as more lenders enter the market, it is worth noting that if there is an option to find another 5% deposit, then rates at 90% LTV start from 3% for a two-year fix and 3.3% for a five-year fix.”

Miles Robinson, head of mortgages at online mortgage broker Trussle, said: “Mortgage rates available to those with a 25% deposit can be around 1.19%.”

Housing Secretary Robert Jenrick said: “One of the biggest divides in our country has been between those who can afford their own home and those who cannot.

“That’s why we are determined to do everything we can to help hard-working families and prospective first-time buyers get their feet on the housing ladder in an easy and affordable way, to level up this country.”

The scheme will be open for applications until December 31 2022.

In 2013, the Government launched the Help to Buy mortgage guarantee scheme in response to a similar shortage of low-deposit mortgages following the 2008 financial crisis.

That initiative helped more than 100,000 households to buy their own home across the UK.

Chancellor Rishi Sunak said: “By giving lenders the option of a Government guarantee on 95% mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”