The government has announced that they are introducing a new mortgage scheme in April 2021 to help people with 5% deposits to get on the property ladder.
The chancellor revealed that the government would provide a guarantee to lenders to enable them to provide 95% mortgages. Anyone who is looking to get on, or step-up on the housing ladder, is eligible for this scheme.
Some of the UK’s biggest lenders have already confirmed that they will be part of the scheme, including Lloyds, Santander, Barclays and HSBC. Virgin Money have also announced that they will be offering the scheme in the near future.
There are currently very few mortgage lenders that are willing to provide buyers with a 95% mortgage. Even the availability of 90% loans (10% deposits) have become limited since the Coronavirus pandemic. The announcement of this scheme is fantastic news for first-time buyers, or anyone with less than 10% equity.
Who is eligible for a 95% mortgage?
Unlike the Help to Buy scheme, these new plans will not be restricted to first-time buyers or new-build homes. Where the property has a value of up to £600,000, anyone is eligible to this scheme. It plans to run until the end of 2022.
Should you continue to save for a larger deposit?
If you can put down a larger deposit on a property, you are more likely to have a wider choice of mortgages with lower interest rates. So, if you are in a position to wait and save for a larger deposit, it will provide you with more options when it comes to your mortgage application.
However, if you are currently renting and also trying to save for a deposit, you may prefer to get on the property ladder as soon as possible. Keep an eye on house prices, as if they were to rise, it will take even longer to save up a decent deposit.
Could the 95% mortgage scheme affect house prices?
This new scheme is similar to the old ‘Help to Buy’ scheme that was closed to new applicants in 2017, homebuyers should not see any practical difference to their mortgage journey.
With the new scheme, lenders are being encouraged to offer 95% mortgages based on the government guaranteeing outstanding loans. This means lenders have a government guarantee in the event that the borrower (homeowner) is unable to meet the monthly mortgage repayments. Or if house prices fall and the property is worth less than the outstanding mortgage loan – this is known as negative equity.
Through this scheme, the government have agreed to cover any risks associated with lending 95% mortgages, and therefore lenders will be more open to lending to homebuyers with a small deposit.
The same affordability checks will be carried out when you submit a mortgage application. Having a 5% deposit will not necessarily be enough to secure a loan, even using this scheme. Homebuyers must prove that they can afford the monthly repayments after all the other essential spends that go out each month, such as car payments and groceries.
There are many online calculators that help to give you an idea of how much a 95% mortgage is going to cost.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
