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How do 5% deposit mortgages work?

How do 5% deposit mortgages work?

For many first-time buyers, being able to secure a 5% deposit mortgage can be the difference between getting on the property ladder and not.

Mortgages available to buyers will smaller deposits have been scarce during the Covid-19 pandemic – but that looks to be changing in 2021 thanks to the new mortgage guarantee scheme.

Here, we’ll explain what the scheme is all about and explore some of the best places to buy in London when you have a 5% deposit…


What is the minimum percentage deposit for a mortgage?

The minimum deposit mortgage lenders will accept is generally 5% of a property’s purchase price.

Prior to the pandemic, a healthy number of mortgage products were available for buyers with either 10% or 5% deposits.

However, many lenders withdrew their low deposit mortgages from the market during the summer of 2020 due to fears over the economy, jobs and buyer incomes sparked by Covid-19.


Can you still get a 5% deposit mortgage?

In March 2021, the government confirmed it would be introducing a mortgage guarantee scheme to support lenders in offering 95% mortgages to low deposit buyers. The scheme launched in April 2021 and will run until December 2022 and should mean many more 5% deposit mortgages become available.


How will the 95% mortgage guarantee scheme work?

Buyers applying for 5% deposit mortgages under the guarantee scheme should notice no difference between those mortgages and any offered by lenders outside of the scheme.

The key to the scheme is that the government will compensate lenders should buyers purchasing homes with those mortgages get into financial difficulty – leaving the lender out of pocket.


Eligibility for the mortgage guarantee scheme

Mortgages under the guarantee scheme are available for first-time buyers and existing homeowners.

However, to be considered for one of the loans, you must:

• Be buying a property that will be your main residence, and not a buy-to-let or second home

• Be buying a property that costs £600,000 or less

• Have a deposit of between 5% and 9%, meaning you’ll require a mortgage of between 91% and 95%

• Be applying for a repayment mortgage and not an interest-only loan

• Pass your lender’s affordability tests – just as you would with any mortgage


Types of mortgages available under the scheme

There’s one stipulation lenders must meet to offer mortgages under the guarantee scheme – they must provide at least one five-year fixed rate mortgage product, meaning buyers get the security of fixed mortgage repayments for that period of time.

As well as fixed rate mortgages under the scheme, lenders could also offer:

• Tracker mortgages

• Discount rate mortgages


Lenders offering mortgages under the scheme

A number of big-name lenders have already committed to offering 5% deposit mortgages under the guarantee scheme, including:

• Lloyds Bank

• NatWest

• Barclays

• HSBC

• Santander

More are expected to follow suit as the scheme beds in.


5% deposit mortgages in London: Where is the best value?

Despite being home to some of the most expensive properties in the UK, London does still offer value to buyers with low deposits.

And with the Help to Buy equity loan and Shared Ownership schemes available on top of the new mortgage guarantee scheme, first-time buyers, in particular, have some good options to get on the property ladder in the capital.

Here, we’ll look at the 5% deposit amounts required for some of London’s best value areas, alongside the salaries you might need to secure a 95% mortgage…


Bethnal Green

Property prices in East London hotspot Bethnal Green have grown by 1.7% over the past 12 months – but still remain below £500,000 on average.

Average property price in Bethnal Green: £489,000

5% deposit required: £24,450

Mortgage amount: £464,550

Household income required for mortgage*: £103,233


Enfield

Enfield in North London is a popular spot for buyers and with house prices in the area having grown by only 0.8% over the past 12 months, it’s an area that offers value for first-timers and low deposit buyers, too.

Average property price in Enfield: £409,978

5% deposit required: £20,498

Mortgage amount: £389,480

Household income required for mortgage*: £86,551


Tottenham

Tottenham is enjoying a period of regeneration and renewed popularity from home buyers and continues to provide superb value for buyers.

Average property price in Tottenham: £390,018

5% deposit required: £19,500

Mortgage amount: £370,518

Household income required for mortgage*: £82,337


Bounds Green

Bounds Green offers great value for buyers looking to be close to the popular Muswell Hill area – but without paying Muswell Hill prices! Property values in Bounds Green have grown by 7.7% over the past 12 months but remain around the £500,000 mark.

Average property price in Bounds Green: £502,419

5% deposit required: £25,120

Mortgage amount: £477,299

Household income required for mortgage*: £106,066


Greenford

Greenford in zone 4 provides buyers with superb transport links into the city, as well as properties averaging less than £450,000.

Average property price in Greenford: £437,423

5% deposit required: £21,871

Mortgage amount: £415,552

Household income required for mortgage*: £92,344


Harrow

Harrow in North London is renowned for its great transport links, particularly via the Underground, and offers buyers great properties averaging less than £450,000.

Average property price in Harrow: £436,512

5% deposit required: £21,825

Mortgage amount: £414,687

Household income required for mortgage*: £92,152


Further reading…

If you’re aiming to buy a home for the first time in 2021, take a look at our guide for first-time buyers, which explains everything you need to know.

* Based on 4.5 x household income lending criteria. Always seek independent financial advice before applying for a mortgage.