In April of 2021 the UK government initiated a 95% mortgage guarantee scheme that encouraged lenders to allow 5% mortgage deposits. The previous minimum was 10%, with some lenders preferring higher, especially if other buyers were interested in the same property.
The 5% deposit scheme will run until December 2022 and be reviewed at a time near this end date to assess the possibility of an extension, if needed.
With house prices ever rising and therefore the deposits along with them, this 5% deposit scheme was supposed to allow buyers that couldn’t afford to save up the deposit costs of 10% and above. This was supposed to especially help first time buyers… but is it worth it?
Deposit Downsides
95% mortgages were previously available for first time buyers to help them get on the property ladder, but the uncertainty of the pandemic saw a lot of these fade away. Though it’s meant fewer options for these first-time buyers, now they’re back, it’s the best time to have a look at their pros and cons.
There are several downsides amongst the positives to the 5% deposit scheme that you need to know about in order to consider if it’s worth taking the plunge. Though if you’re still unsure after reading, it’s always worth consulting an expert for professional mortgage advice. They’ll be able to look at your financial circumstances and plan what’s best for you.
Less Equity and Complications
The smaller your deposit, the less equity you’ll have in your property, meaning less overall ownership and control. This could also lead to the risk of negative equity if property prices fall. When a property is less than the mortgage you took out on it, you could find it difficult to move house or remortgage.
They’re Harder to Find
While it’s now possible to get a 5% mortgage and the government has encouraged lenders to offer them, they are not as easily available as mortgages with higher deposits. Even though many major banks such as Barclays, HSBC, Lloyds Bank, NatWest and Santander have launched the 95% deals and made it possible, the market is still flooded with expectations of 10% and over.
Higher Monthly Repayments
The higher percentage you put in for your deposit, the lower your monthly repayments will be, so this will take some of the pressure off on monthly bills.
Though not possible or applicable for everyone; one method you could take is saving up for a bigger deposit at a time when you’re in a better position to do so (younger, living at home with parents/family or house sharing with friends, less responsibilities/children, etc.).
The lower monthly repayments will be less of a concern if circumstances unexpectedly change (loss of work, extra expenses, something like your car breaks down).
Of course, not everyone is in a position to do these things. But the good news is that with 5% deposits you can extend your deposit up to 9%, so if you can’t quite reach 10%, you can put in anything under that, with 5% being the minimum. So any little extra stretch you can make will help you in the long run.
It’ll Also Mean a Higher Interest Rate
Along with lower monthly repayments, a higher deposit will mean lower interest rates. As lenders are taking more of a risk when they offer a loan that consists of 95% of your property’s value. But with a low deposit, high interest rate, this ends up meaning your property will cost you more in the long run.
If It Works for You, Go for It
Whilst you should always aspire to save and put down as much of a mortgage deposit as you possibly can. It’s not always possible for everyone as we all have different circumstances. If you can use the 5% deposit scheme wisely and to your advantage, then it could be the lifeline you need to get on the property ladder.
Like everything in life, there are pros and cons to consider. Assess your finances, salary, bills, current debts and how much your costs are likely to be in the future. And remember, you can always go to a mortgage broker or adviser to look at this information for you and get their expert input.