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The low-deposit mortgage scheme: what you need to know

The low-deposit mortgage scheme: what you need to know
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The UK government’s new low-deposit mortgage scheme began on 19 April 2021. But what does the announcement mean for homebuyers in the UK, and how does a low-deposit mortgage work? Let’s take a look. 

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What is the 95% deposit mortgage scheme?

Essentially, it’s just like any other 95% mortgage. If you’ve got a 5% deposit, you can get a mortgage covering the remaining 95% of the purchase price. So, if you’re buying a property worth £100,000, and you’ve got a £5,000 deposit, you could get a mortgage for the remaining £95,000. 

The difference? The government is guaranteeing mortgages under the scheme. So, if you default on the loan repayments, the government ‘guarantees’ to cover some of the shortfall. 

What’s the reason for the scheme? Well, it’s simple. The Covid-19 lockdown caused a surge in demand for homeownership, which pushed up house prices. Since it’s more challenging to get on the property ladder than before, the scheme offers a lifeline to those hoping to finally buy their own place. 

Who can apply for a low-deposit mortgage under the scheme?

If you’re buying a home worth less than £600,000 and you can pay a 5% deposit, you can use the scheme. You don’t have to be a first-time buyer. You’ll still need to pass a lender’s general eligibility checks, though, which means you’ll usually need to show you can afford the monthly repayments.

All that aside, you can’t use a government-backed mortgage for new-builds, second homes or rental properties. You must be buying your main place of residence in the UK. 

If you use the scheme, you can only apply for a repayment mortgage, not an interest-only mortgage. In other words, you need to pay back the amount you borrowed plus interest each month. You can’t just pay the monthly interest and then pay off the balance once the mortgage term ends.    

Where can I get a low-deposit mortgage?

Here’s a list of the lenders already signed up:

  • Barclays
  • HSBC
  • Lloyds
  • NatWest
  • Santander

Other major lenders like Virgin Money are expected to join the scheme in the coming months. Interest rates are hovering around 4% for the most part, though they vary by lender. Still, it’s important you shop around or check out some comparison websites to get the best deal possible.  

How do I apply for a 95% mortgage?

You can apply for a low-deposit mortgage under the scheme the same way you apply for a regular mortgage: 

  • Find a mortgage deal you’re interested in, either by doing your own research or using a mortgage broker. 
  • Ensure you’ve got payslips to prove you can afford the monthly repayments. If you’re self-employed, you’ll need a few years’ worth of accounts instead. 
  • Make your application. Each lender will have its own process for this. 

You might want to speak to an FCA-approved financial adviser before you apply for a mortgage under the scheme – they can give you advice tailored to your specific circumstances. 

Is a low-deposit mortgage right for me?

Ultimately, it depends on how much you can afford to save, and how quickly you want to join the property ladder. While you may secure better interest rates if you can afford a 10% deposit, a 95% mortgage could be the stepping stone you need to buy your first home. 

Just remember, though, that the options under the government-backed scheme are limited, and you can’t apply for an interest-only mortgage. So, if you want access to a wider range of mortgages, you might want to save a little longer and go for a 90% mortgage instead. 

Whether you choose a low-deposit mortgage or not, just remember that any mortgage is a big financial commitment. Be sure you can afford the monthly repayments before you apply, or you could end up with a mortgage you can’t afford. 

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