Low-deposit mortgage scheme backed by government launches - what home buyers need to know

Home buyers with deposits as low as 5% will find more deals available from Monday, as a new UK Government-backed mortgage scheme gets under way.

Several of Britain’s biggest mortgage lenders are turning on the taps to boost the supply of low deposit home loans, under an initiative unveiled in the Budget.

The Government scheme is being made available to lenders from Monday.

Lloyds, Santander, Barclays, HSBC UK and NatWest will be among the first to launch mortgages under the scheme, with Virgin Money following next month.

The number of low deposit mortgages on the market shrank dramatically in the early days of the coronavirus pandemic, as lenders became much more cautious about offering “riskier” loans in the tough economy.

The new scheme will tackle this by helping first-time buyers or current home owners secure a mortgage with just a 5% deposit to buy a house for up to £600,000.

It will work by offering lenders the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.

The UK Government said that when asked,  69% of private renters who had looked into a mortgage said they could not find many deals with a low deposit.

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Housing Secretary Robert Jenrick said: “For too many people, no matter how hard they work, home ownership can seem out of reach. One of the biggest divides in our country has been between those who can afford their own home and those who cannot.

“That’s why we are determined to do everything we can to help hard-working families and prospective first-time buyers get their feet on the housing ladder in an easy and affordable way, to level up this country.

“The new mortgage guarantee scheme which comes into effect today will give providers the confidence to lend and help families and young people get on the property ladder without the prohibitive burden of a large deposit.”

He added: “Together we can turn Generation Rent into Generation Buy.”

In general, the scheme, which will be open for applications until December 31 2022, can be used for new or existing properties.

Lenders will be able to purchase a Government guarantee that would compensate them for a portion of their losses in the event of a repossession.

The guarantee will be valid for up to seven years after the mortgage is originated.

The new scheme will mirror a “tried and tested” initiative which reinvigorated the mortgage market in the recent past.

In 2013, the Government launched the Help to Buy mortgage guarantee scheme in response to a similar shortage of low-deposit mortgages following the 2008 financial crisis.

That initiative helped more than 100,000 households to buy their own home across the UK.

The previous Help to Buy scheme also had the effect of boosting competition in the 5% deposit bracket among lenders who were not part of the scheme.

They ramped up their low-deposit ranges in order to compete with lenders taking part in the initiative.

Chancellor Rishi Sunak said: “Every new home owner 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% mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”

The new scheme has been launched at a time when house sellers are demanding record sums for properties.

Rightmove said Monday that average seller asking prices hit a new record high of £327,797 in April, after jumping by £6,733 or 2.1% month on month.

According to financial information website Moneyfacts, 5% deposit deals have already started to make a return to the market in recent weeks, outside the scheme.

Moneyfacts recently counted 34 deals for borrowers with a 5% deposit available in April, down from just five in March.

This is still a long way away from the situation a year ago, when more than 160 deals for borrowers with 5% deposits were available.

Miguel Sard, managing director of home buying and ownership at NatWest said: “A Government-backed scheme will help segments of the market for whom home ownership has felt far out of reach in recent months.”

Mark Hayward, chief policy adviser at Propertymark, which represents property professionals including estate agents said: “Coupled with the decision to extend the stamp duty holiday further, the mortgage guarantee scheme will provide additional options for more people to become home owners.”

Susan Allen, chief executive of retail and business banking at Santander said: “We see how important home ownership is to our customers.”

Michelle Andrews, HSBC UK’s head of buying a home said: “After such a turbulent year it is great that this scheme will make a real difference in enabling first-time buyers who didn’t think they would have a chance of getting a mortgage and home movers to get the keys to their new home.”