What is the new 5% deposit mortgage scheme?

The Government has announced a new 5% deposit 'mortgage guarantee' to help potential homebuyers.

Conveyancing Executive, Cheryl Phimister looks at the new mortgage loan scheme and details what it means for buyers and lenders.

What is the 5% deposit mortgage scheme?

The scheme allows homebuyers who provide a deposit of at least 5% to take out 95% loan-to-value mortgages.

This only applies to potential buyers looking to purchase a main residential home in the UK worth up to £600,000.

Who is eligible for 5% deposit?

The mortgages will be available for home movers and first time buyers; but, as previously mentioned, is capped at £600,000.

This differs from the new help to buy equity loan scheme, which was altered to only include first time buyers. You can read my colleague Clare Hallett's article on the scheme here.

When are these mortgages available?

The mortgages will be available from April and can be taken out until the scheme runs out in December 2022.

Why has the 5% deposit been introduced?

The policy has been introduced in order to encourage more lenders to rejoin the 95% market, previously only a few banks have offered 5% deposit; and when they have it has only been for a limited time.

In addition, the mortgage scheme aims to give potential buyers who can't afford huge deposits a chance to get on to the property ladder. According to Boris Johnson, The Government want to 'turn generation rent into generation buy'.

Which lenders offer 5% deposits?

UK banks and building societies are not required to offer the mortgages, however many have already agreed to do so, according to The Chancellor; these include "Lloyds, NatWest, Santander, Barclays and HSBC".

These loans have been risky in the past, as some buyers have previously ended up in negative equity - meaning people hold more debt than the worth of their home. This has a knock on effect for lenders.

This is why the 'government guarantee' has been put in place, The Government will offer to take on some of the risk of low deposit loans; giving lenders some protection from loss. Furthermore, the buyer will gain compensation for a portion of their losses if needed.

How have people reacted to the mortgage guarantee scheme?

There has been some criticism of the scheme, despite its good intentions; it seems to still be unreachable for some buyers who need it most. According to the ONS, the average house price for first time buyers in 2020 was £239,000; the 5% deposit required for this would be £11,950.

Saving up that much money for a deposit can be very difficult, especially for people who are paying rent. On top of this, banks will only loan 4.5 times your salary, meaning that in order to receive the 95% loan (£227,050) the buyer will need to be earning a salary of £50,455 per year.

The average salary for full time employees in 2020 was £38,600.

What else was announced in the Budget Plan?

• The national living wage was confirmed to be £8.91 from April 1st; which is, in effect, the minimum wage of those aged 23 or over.
• The Furlough Scheme was extended until September
• Stamp duty holiday has been extended until the end of June.

A specialist conveyancing solicitor's view

Cheryl Phimister, an Executive in our Conveyancing Team, says 'This is great news for first time buyers who were previously priced out of the market and unable to save for a larger deposit which were required to be around 15-20% in some cases. It is also good to see some major lenders participating in this scheme and no doubt more will follow.'

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