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How the new low-deposit mortgage scheme works

Government vows to turn ‘Generation Rent’ into ‘Generation Buy’

First-time buyers and current homeowners will be able to purchase a house with just a 5% deposit under a new government scheme that launches today.

Housing Secretary Robert Jenrick has promised it will “help families and young people get on the property ladder without the prohibitive burden of a large deposit” – turning “Generation Rent into Generation Buy”, the Evening Standard reports.

How does it work?

Homebuyers will be able to secure a mortgage from one of six high street lenders with only a 5% deposit. Lloyds, Santander, Barclays, HSBC and NatWest are launching mortgages under the scheme today, with Virgin Money starting in May.

The scheme is designed to increase the number of mortgage deals for people with low deposits, which have greatly reduced during the pandemic. Under the new scheme, in the event of repossession, the government would compensate the lender for a portion of the losses suffered.

Who is eligible?

According to documents released by the Treasury after Rishi Sunak’s Budget announcement in March, the scheme will be available for individuals buying a UK house to live in, rather than a second property.

The house must be £600,000 or less and bought with a repayment mortgage, not an interest-only one. It must also have a loan-to-value ratio of between 91% and 95%. On top of this, the lender will assess the borrower’s ability to repay the loan using its own affordability checks.

How long will the offer last?

The government has said the scheme is a “temporary measure” in response to the pandemic, so will be open only until December 2022. However, it will review this end date and extend it if necessary.

The guarantee for lenders will be valid for seven years. “Evidence shows that loans are unlikely to default after such a period has elapsed,” the gov.uk site says.

Are there any drawbacks?

According to the Financial Times, some of the banks who have signed up to the scheme have refused to lend against new-build properties, which has added to concerns that the programme will have “limited impact”.

Simon Gammon, managing partner of mortgage broker Knight Frank Finance, told the newspaper it is “ultimately a well-intentioned but probably limited in scale scheme”.

Gammon said there are fears that banks will use particularly strict affordability criteria and charge higher interest rates than products for people with higher deposits.

“A number of people will be able to take advantage of it, but not all the people the government intended to make it accessible to,” he said.

City A.M. also notes that “it comes as UK property prices continue to rise to record levels, making it harder for first-time buyers to stump up the deposit needed to own a home”.

However, Eleanor Williams, from financial information service Moneyfacts, tells the BBC that homebuyers should benefit if more lenders launch low-deposit deals. “Increased competition within the higher loan-to-value tiers will hopefully translate to more competitive rates for these borrowers,” she said.

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