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What you need to know about the new low deposit mortgage scheme that's just come into effect

Megan Sutton
·4-min read
Photo credit: twomeows - Getty Images
Photo credit: twomeows - Getty Images

Becoming a homeowner is definitely more than a little bit confusing (why didn't they teach us about credit scores, mortgages and interest rates at school, please?) but it's fairly commonly known that a key barrier to getting a foot on the housing ladder is the need for a large upfront deposit.

Typically, prospective homeowners need to put forward a deposit of at least 10% of the property's overall price, although ideally up to 15% or more, if possible. Given we're in an age of inflating property prices and a lack of truly affordable housing, this chunk of money needed upfront can price many people out of owning a home. We're not called Generation Rent for nothing.

Now, a new government-backed mortgage scheme is aiming to help people become homeowners by securing a mortgage with just a 5% deposit.

Miguel Sard, Managing Director of Home Buying and Ownership at NatWest said:

"We welcome the government’s new mortgage guarantee scheme to give further support to those with smaller deposits. For those customers, particularly younger or first-time buyers, saving up for a big deposit can often be difficult, and we know people in these groups are some of the hardest hit by the effects of the pandemic.

"A government-backed scheme will help segments of the market for whom home ownership has felt far out of reach in recent months."

Photo credit: Catherine Falls Commercial - Getty Images
Photo credit: Catherine Falls Commercial - Getty Images

So, what's the deal with the new 5% mortgage scheme? Who can benefit from it? And are there any restrictions or pitfalls? Here's what you need to know...

Low deposit mortgage: What's the criteria for getting one?

The scheme is open to first time buyers or current homeowners who can afford to put down a 5% deposit to buy a property up to the value of £600,000, the government has announced. There are some exclusions on the kind of properties eligible, though - more on this below.

Low deposit mortgage: What lenders are offering this option?

The scheme is now available from lenders on high streets across the country, with Lloyds, Santander, Barclays, HSBC and NatWest offering mortgages under the scheme from the first day of its launch (19 April) and Virgin Money following in May.

Under the scheme, the government will compensate the lender for a portion of the net losses suffered in the event of repossession.

Lenders have outlined their rates and fees for the new 5% mortgage scheme with NatWest offering a 3.90% fixed rate over two years (with no fees) and Coventry Building Society offering a 3.89% rate over five years with fees of £999.

Low deposit mortgage: When will the scheme end?

The scheme is intended as a temporary measure. It will be open for new mortgage applications from April 2021 to December 2022.

The government has said it will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective home owners.

Photo credit: Constantine Johnny - Getty Images
Photo credit: Constantine Johnny - Getty Images

Low deposit mortgage: What else to consider

Not every home transaction is eligible automatically for a 5% mortgage deal. As well as the upper property value cap of £600,000, many of the largest banks are refusing to provide low deposit mortgages to buyers of new-build properties because of concerns about inflated prices.

Some lenders are also excluding flats and maisonettes from lower deposit mortgage schemes. Yorkshire building society’s Accord Mortgages arm is offering a five-year fixed rate mortgage deal at 3.99% to first time buyers with a 5% deposit, but this deal can’t be used to buy a flat.

“A number of people will be able to take advantage of it, but not all the people the government intended to make it accessible to,” Simon Gammon, managing partner of Knight Frank Finance, the mortgage broker told the Financial Times.

Housing journalist Victoria Spratt has pointed out that with much of the housing market still generally unaffordable to most, the 5% deposit scheme isn't offering a proper solution to the problems facing Generation Rent.

"Are we 'helping young people get on the housing ladder' when we introduce low deposit mortgage products or are we making it easier to get credit to buy unaffordable housing, the price of which has increased beyond wages?" she wrote on Twitter.

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Clearly, it's important when considering any kind of mortgage to do thorough research and consult with experts who can offer professional advice.

You can find more information on the new low deposit mortgage scheme on the government website here.

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