Low-deposit mortgage scheme: What is it and am I eligible?

A new government guarantee scheme to help homebuyers secure mortgages with a deposit of just 5 per cent has been launched.

High street lenders on Monday began offering the 95 per cent mortgage guarantee, which is aimed at helping first-time buyers get on the property ladder.

The policy, which was first announced in the Budget, means that first-time buyers or current homeowners will be able to secure a mortgage with a 5 per cent deposit to buy a house of up to £600,000.

But it comes as UK house prices surge, with online property platform Rightmove saying that the average asking price jumped by 2.1 per cent in April to a new record high of £327,797 - a £6,733 increase from March.

How does it work?

Any first-time buyers or current homeowners buying a home costing up to £600,000 will be eligible for the scheme, unless they are buy-to-let or second homes.

The government will offer a partial guarantee that lenders need in order to provide mortgages that cover the other 95 per cent, subject to affordability checks. Many loan-to-value mortgages were withdrawn during the Covid crisis due to uncertainty and disruption caused by the pandemic.

According to Which?, most of the 95 per cent deals launched so far are available at up to four-and-a-half times a household’s income, which means if a couple earns £30,000 each, they should be able to borrow up to £270,000.

Chancellor Rishi Sunak said of the new scheme: “Every new homeowners and mover supports jobs right across the housing sector, but saving for a big enough deposit can be hard, especially for first time buyers.

“By giving lenders the option of a government guarantee on 95 per cent mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”

Who will offer it?

Lloyds, Santander, Barclays, HSBC and NatWest have started offering products this week. Virgin Money will join them from next month.

Some lenders have imposed conditions. Halifax, part of Lloyds Banking Group, and Barclays said the mortgage guarantee will not be available for new-build properties.

Lenders will still carry out affordability checks, which may have an impact on people who have become unemployed or whose income has been affected by the pandemic.

Most lenders are launching their deals at around 4 per cent for a two-year fixed rate deal, which NatWest head of mortgages Lloyd Cochran said “reflects the extra risk the bank is taking on”.

Will the new scheme affect 90 per cent deposits?

The increase in 95 per cent mortgage deals may have a “knock-on effect” in pushing down the cost of 90 per cent mortgages, says Which?.

The money-saving comparison website advises buyers who can stretch to a 10 per cent deposit to keep an eye on 90 per cent mortgages in the coming weeks.

Eleanor Williams, from financial information service Moneyfacts, adds that rates could be cut by as much as 0.75 of a percentage point for those able to afford a 10 per cent deposit.

She told the BBC: “With more lenders poised to launch deals for this sector of the market, [borrowers] level of choice should hopefully increase even further.

“Increased competition within the the higher loan-to-value tiers will hopefully translate to more competitive rates for these borrowers.”