Top 10 Questions About 5% Deposit Mortgage Answered

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I think we can all agree that the government made some interesting decisions this year, but one of the better ones are the new 5% deposit mortgages that have been rolled out to potentially help millions of Brits get onto the property ladder.

But what exactly are these schemes? How do they work and who is eligible? Can you buy any type of property? And what about your credit rating – does that make a difference?

In this article I’m going to be looking at the PM’s promise to turn “generation rent into generation buy”, and answering those questions and more. 

What Is A 5% Deposit Mortgage And How Does It Work?

Put simply, you put down 5% of the property value as a deposit, and then borrow the remaining 95% from a lender – although there are variations of this depending on which type of mortgage scheme you go for.

But, as a basic example, if you wanted to buy a house that’s worth £200,000, you will put down a £10,000 deposit, and get a mortgage for £190,000. 

What 5% Deposit Options Do I Have?

The need for a large deposit is often the stumbling block for many people, so only needing a 5% deposit is music to the ears of first-time buyers – particularly if you’ve been renting and therefore struggling to save enough to buy your own home. 

The government’s Help To Buy scheme (HTB) allows you to put down a 5% deposit, and then provides an additional 20% loan on top. This means that you’ll only need a mortgage for 75% of the purchase price.

The 20% government loan is interest-free for 5 years and is repayable after 25 years – or earlier if you sell your home.  

Currently, the scheme is open to both first-time buyers and homeowners, but there are some changes being made to the Help to Buy scheme in 2021, making it only available to first-time buyers. 

If you are already a homeowner and want to take advantage of the scheme you would need to buy a house built by 31st December 2020 and have completed on your sale by 31st March 2021. 

At the moment, in England the Help to Buy scheme is only available on new-build properties, so if you’ve always fancied yourself in a period property, or love aren’t a fan of modern architecture, then this scheme might not be for you. Similarly if you have your heart set on living in a certain area; not all developers offer the scheme, so your choice of location will be limited. 

Shared Ownership

The new shared ownership model has been one of the main outcomes of the government’s pledge to increase affordable housing across the UK, and, like the Help To Buy is an alternative route to getting on the housing ladder. 

Instead of getting a mortgage on the whole property, you buy a share, and then pay a mortgage on that share each month. You pay rent on the rest of the property to your local housing association. 

As with the Help To Buy scheme, a deposit for a shared ownership home can be as low as 5% – although of course, unlike the Help To Buy scheme, there is no government loan involved. 

Standard Mortgages

This is just a ‘normal’ mortgage; no particular ‘schemes’ involved…no government loan or part-rent element – just you, buying a house, with a 5% deposit. 

Who Are 5% Deposit Mortgages For?

Luckily, there’s an option for everyone…

A standard mortgage is available to anyone who passes the individual lender’s criteria – it doesn’t matter if you’re buying your first house or your fiftieth.

READ  The Differences Between Residential and Commercial Mortgages

Currently, the Help To Buy scheme is open to both first-time buyers and homeowners, but there are some changes being made to the Help To Buy scheme in 2021, making it only available to first-time buyers. 

If you are already a homeowner and want to take advantage of the scheme you would need to buy a house built by 31st December 2020 and have completed on your sale by 31st March 2021. 

Shared Ownership is only for first time buyers as well – unless you used to own a home but can’t afford to buy one again. For example, if you’ve got divorced and it’s left you unable to afford a deposit, or you’ve moved into a less well-paid job, you could still be eligible for the scheme. 

Can I Get A 5% Deposit Mortgage At The Moment?

5% deposit mortgages have become much harder to get in the wake of the coronavirus pandemic, with only 10 95% mortgage products available on the market by August 2020, compared to 273 in March. 

This doesn’t mean you can’t get one, but it does mean that in this current climate lender will be restricting these deals to the lowest-risk applicants – so those with stable, long-term jobs and excellent credit scores. You might even need to have a guarantor (probably a parent), who can cover your mortgage repayments if you can’t. 

If you’ve saved a small amount for a deposit, but you’re not sure that those criteria apply to you at the moment, you might be better off seeing what happens to the mortgage market over the next 6-12 months, when more lenders might be offering them. 

So I Won’t Get A 5% Deposit Mortgage If I Have Bad Credit?

Affordability testing is carried out on any type of mortgage product you take out, and 5% deposit mortgage is no exception. 

Of course a huge part of that testing is a credit check. Lenders will want to see that you’ve been paying your bills, credit card payments, and loan repayments on time – for obvious reasons. If you’re paying rent you can incorporate that into your Experian credit history, which will help improve your rating (if you’re paying it in full and on time of course!).

Being on the electoral roll is essential to boost your credit rating, and you can improve it further by keeping an eye on it and making sure there are no mistakes on there, as well as ensuring that anything you can pay off – you pay off!

Lenders will also assess your income and regular outgoings, as well as any debts, to determine whether you can afford a mortgage. They’ll also ‘stress test’ your finances, by checking that you could still afford your monthly mortgage repayments if the interest rates were to rise. 

What Type Of Property Can I Get With A 5% Deposit Mortgage?

When it comes to the HTB scheme and Shared Ownership, you’ll be limited to the type of property you can buy, in which area. 

The properties available on these schemes are new-build and are located in certain areas, so you are somewhat limited.  

It’s also worth knowing that if you go into Shared Ownership, you may well be limited to what you can do home-improvement wise before you have a mortgage on the whole property. I’m not talking about painting and decorating – that will be fine – but you’ll have to get in touch with your housing association before you start landscaping the garden, knocking down walls or repaving the driveway.

READ  The Help to Buy Scheme: A Homebuyers Guide

If you find a lender who is offering 5% mortgages, regardless of HTB or Shared Ownership, then there won’t be a limit to what type of property you can purchase.

Where Can I Get a 5% Deposit Mortgage From?

As with any mortgage product, my advice would always be to seek the advice of a mortgage broker. A mortgage broker does all the leg work so that you don’t have to, and has access to and knowledge of products and lenders you may not. 

A broker can find a mortgage product to suit your needs, and knows who is likely to give you a mortgage and who isn’t, saving you a lengthy and possibly needless application process. 

Who Offers 5% Deposit Mortgages?

As I said earlier, those lenders offering 95% mortgages have fallen dramatically recently, but that’s not to say that won’t change in due course. 

Again, speaking with a broker is your best bet of finding out who is offering the best type of mortgage product to suit you.

Should I Just Wait And Save 10% For A Deposit?

Common sense tells us that the more money we can put down as a deposit, the less we have to borrow – and the less a lender has to lend, the more likely you are to get accepted for a mortgage. 

Of course having 10% is better than 5%….but having 15% or 20% would be even better, and so on and so forth. However, even a 5% deposit can be a huge amount to save – especially if you’re renting. 

Can I Get Trapped In My 5% Mortgage Scheme?

There’s been a lot of talk in the press about whether or not first-time buyers face being ‘trapped’ when it comes to the government’s Help To Buy scheme. 

But what does it mean exactly?

Well, the HTB scheme provides a 20% equity loan, which is interest-free for the first 5 years, alongside your own 5% – giving you a 25% deposit to put down on your first home. 

This is great… a few points to remember though, when your 5 year fixed-rate mortgage comes to an end, you will need to start repaying back the equity loan; you’ll also have to remortgage. 

Some lenders don’t offer remortgages under the HTB scheme – despite the fact that they sold you your original mortgage. So, you may have to choose a different lender. 

And if you go to another lender?

Well, some will insist on the equity loan being repaid as part of the remortgage – which means a bigger loan and higher repayments. There are only a handful of lenders who will let you keep the equity loan separate. 

Of course, if you can afford to pay off the whole equity loan it means that the remaining mortgage is just a standard mortgage, which will give you a lot more options when it comes to lenders. 

The Shared Ownership scheme comes with a few points to remember if you plan to increase your ownership share – aka ‘Staircasing’. The costs that are involved, including a valuation fee and legal expenses. 

I hope this blog has helped answered questions and given you an insight into what options you can chose from. 

Your home may be repossessed if you do not keep up repayments on your mortgage.

Andy

Andy

28 years is a long time to do anything and that’s how long I’ve been giving financial advice for! Everything you’ll ever need to know about Mortgages and Home Insurance can be found within the digital walls of this website. Fill your boots with as much knowledge as possible and if you have further questions or would like to get the ball rolling on buying your new home then I would love to help you! I promise to keep things as simple as they need to be and don’t worry about all the paperwork, me and my team can cover that!

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