5% deposit mortgages government scheme
The pandemic struck, house prices started falling, and the real estate market hit a bout of uncertainty. Some homeowners hit negative equity, and the government was concerned about this.
The residential property market was not attractive since buyers were not budging, causing a lack of equilibrium.
To balance the scales, the government began encouraging lenders to revive the 5% deposit mortgage to attract prospective buyers with a low deposit.
Since the interest-only mortgage offering was not attractive to either party, the low-deposit mortgages were the winning ticket.
How does this initiative work, and what are some of its benefits?
Here is a detailed breakdown of the 5% deposit mortgage and its primary benefits for home buyers.
How does the 5% mortgage guarantee scheme work?
Just when everything seemed to be going very wrong in the world, the 5% mortgage guarantee scheme appeared to be a silver lining for prospective home buyers.
This mortgage scheme is the perfect fit if you can’t afford a large deposit. How does it work? The scheme guarantees to cover a certain amount of losses if the property is repossessed.
Therefore, it is more of an encouragement to all lenders to approve such mortgage applications as the risk is reduced. The mortgage scheme allows home buyers to put down a low deposit and then pay higher monthly payments towards the 5% mortgage.
Lenders can fix the mortgage for a certain term. Throughout that term, the interest rate won’t fluctuate, minimizing the risk of paying higher repayments when the CPI index soars.
Benefits of the government’s mortgage guarantee scheme
The government guarantee scheme directly benefits lenders since they guarantee that the government will cover a portion of the losses they make when a property is repossessed, but how do the buyers benefit?
You don’t need a large deposit to secure a home
The main benefit of the government’s mortgage scheme is that it allows prospective buyers with a low deposit to buy into the real estate market. For some would-be house buyers, the main drawback of a mortgage is saving up for the deposit.
With this government-backed scheme, buying a house is a bit more achievable.
If the buyer’s financial situation can accommodate larger monthly repayments, the 95% mortgage can be an excellent fit. It could even seem like a tailor-made solution for individuals with such financial circumstances.
For example, when buying a £400,000 house with a 95% mortgage LTV, the deposit will be £20,000, but the monthly repayments will be higher since £380,000 has to be paid off through monthly repayments.
Interest rates tend not to differ
Typically, there is a phenomenon whereby government schemes drive up the interest rate of that respective sector receiving aid. Some might wonder if the 95% mortgage LTV scheme does not fall under that category, especially since the real-estate sector is so lucrative.
What is the catch? As you might be wondering. The catch is driving economic growth through the residential real estate market. The government was not targeting high-interest rates to fatten its annual budget. Therefore, the interest rates tend not to differ compared to the 95% mortgage scheme.
The mortgage’s term determines the interest rate quoted to your mortgage and how much of financial risk lenders deem you to be.
You can get into your home sooner
When thinking of buying a house, some consider saving up a large deposit which delays their timeframe of purchasing their first home. Some homeowners have saved up for over half a decade to accumulate a generous deposit before applying for a mortgage. As a result, this delays their progress as it takes longer to secure a mortgage to buy a house.
The 95% mortgage scheme allows residential property buyers to get a house sooner. Since a 5% deposit mortgage requires low upfront costs, buyers do not have to wait as long to secure a mortgage. Using the services of a mortgage broker can help expedite the process even further for the applicant.
You can get fixed payment for the following five years
Lastly, home buyers get options for fixed-rate deals relative to the purchase price and interest rate. For 5% deposit mortgages, this can go a long way, especially since this type of mortgage is capital repayment. A standard variable rate will apply to the monthly payments if the mortgage does not have a fixed rate term.
As a result, the payments could vary each month since they depend on the interest rate charged by the lender. Whereas with a fixed payment agreement, you get to pay the same price until the term ends.
Lenders tend to offer five-year fixed payment terms on 95% loan-to-value mortgages, which makes a world of difference for first-time buyers that just moved into their homes.
Who qualifies for the 95% LTV mortgage deal?
This mortgage scheme is open to both first-time buyers looking for a low deposit mortgage and home movers buying for the second time, and so forth. It is free for any UK citizen and resident who qualifies for other types of mortgages. Although this mortgage scheme is liberal, it is not a free-for-all.
Specific criteria must be satisfied before being approved for this mortgage. Here are some critical aspects of eligibility when applying for the 5% deposit mortgages:
- The property being purchased must be the primary residence, not a second home or a rent-to-buy.
- The prospective property’s value must not exceed £600,000, and the deposit should be between 5-9%.
- Affordability for monthly repayments and satisfying basic eligibility criteria from respective lenders.
Are there other options?
The 95% mortgage surely can’t be the only incentive or option available. Are there any alternatives to the 5% deposit mortgage?
Some alternatives are not directly incentives from the government but options that home buyers can leverage to move into their dream homes quicker and more efficiently.
Shared ownership
Some building societies and councils offer shared ownership of property which might be a convenient option for buyers that are not keen on taking out interest-only mortgages or can’t afford monthly repayments of 5% deposit mortgages. This plan operates uniquely from most offerings from mortgage lenders.
If you can afford to buy a share of the property, you can move in but pay rent to the landlord for the remaining share. You can buy a share of the property through a mortgage or a lump sum payment or purchase a larger share to reduce the monthly rent price as time passes.
The concept is out-of-the-box thinking, but it has also proven very effective since its implementation. For cash-strapped individuals, this might be the only affordable and suitable option for their circumstances.
Help to Buy: Equity Loan scheme
Another alternative that might work well for a first-time buyer is the Help to Buy Equity Loans scheme. This scheme works slightly differently from the 95% Mortgage LTV because it mainly finances buying new homes. You can also put down a minimum deposit of 5%, and you won’t be charged interest for the first five years.
From then, the interest varies according to the CPI, which provides relative insulation from negative equity should the property’s value depreciate. The maximum property value you can buy using this scheme is also contingent on the state ranging between £186,100 to £600,000.
The catch is that you must be a first-time home buyer in the UK and abroad. If you have owned a residential property, your eligibility might be problematic when applying for the Help to Buy Equity Loan Scheme.
Guarantor Mortgages
Guarantor mortgages are more of a traditional approach for home buyers with bad credit records that could repel lenders from their mortgage approvals.
You have to find someone who trusts you enough to guarantee that they will be your safety net should the monthly repayment not be made in a timely way.
That person will have to legally bind themself by signing the same documentation you will be signing when getting the mortgage. However, at the end of the term, you will own the house, not the guarantor.
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Frequently Asked Questions
What is the 5% government scheme?
The 5% government scheme is an initiative by the government to grow the housing market and get potential residential property buyers on the property ladder sooner.
You only pay a 5% deposit and then pick a repayment term. If the property is repossessed, this government-backed mortgage scheme will cover roughly 14.5% of the losses to the lender.
What is the new government mortgage scheme?
Several government schemes were launched during the COVID-19 lockdown period. They still exist and could help home buyers get a low-deposit mortgage or home ownership in some other way. Amongst all these schemes, the 5% deposit mortgage plan is one of the newest and most effective.
Is the mortgage guarantee scheme still available?
The mortgage guarantee scheme was scheduled to be discontinued after December 2022, but it has proven to be quite effective, and there is a good chance the government could extend it beyond this set period.
Since its implementation, house prices have soared – a positive sign for the real estate sector.
Final Thoughts
First-time buyers, families, and individuals relocating can make the best use of the 5% mortgage. Although these mortgage payments could be a bit higher than other mortgage offerings, this option expedites potential home buyers when buying a home.
Depending on what your mortgage broker has in store for you, your application will likely wind up with a mortgage lender offering a 95% mortgage if you have a low deposit.
However, remember that mortgage brokers have more experience and assess your circumstances when looking for a repayment mortgage, which is why you are bound to get the best deal this way.