What is the 5% deposit mortgage guarantee scheme?

The mortgage guarantee scheme is a government scheme that will help first time buyers and some existing homeowners afford to buy a home with a deposit as small as 5%. This is also known as a 95% LTV mortgage.

It was announced by the government on 3 March 2021 and many high street lenders, including Barclays, NatWest and HSBC, now offer 95% mortgages that use the scheme.

Why the scheme has been introduced

It’s the government’s aim that the scheme will motivate lenders to offer more mortgages for homebuyers with a deposit of less than 10%.

This will make it easier for people to buy a home with a smaller deposit.

How to get a 5% deposit mortgage with the government guarantee

5% deposit mortgages backed by the government's guarantee scheme are available today.

Most of the UK's biggest mortgage lenders, including Halifax, Lloyds, NatWest, Barclays and HSBC have 95% LTV mortgages that use the scheme.

You can apply for one of these new 5% deposit mortgages by talking to a mortgage broker (like Trussle) or by going directly to the lender of your choice.

There is also a range of 5% mortgages available that do not use the new guarantee scheme. They are just normal 95% LTV mortgages. A mortgage broker like Trussle can help find the right one for you.

How the 5% deposit mortgage guarantee scheme works

The mortgage guarantee scheme aims to get more people on the property ladder by giving lenders a reason to offer more high LTV mortgages to people who can only afford small deposits.

To do this, the scheme needs to reassure lenders that they won’t lose out if a customer cannot pay their mortgage.

The scheme works by guaranteeing the lender a portion of any losses if a home is repossessed when the buyer is not able to make their mortgage payments.

Once you get approved for a mortgage using the scheme, it’ll be valid for up to 7 years. 

This is because homeowners would normally have repaid enough of their mortgage that they own at least 10% of their home.

Who can use the 5% deposit mortgage guarantee scheme

The scheme is mainly aimed at first time buyers, but it can also be used by current homeowners. 

Homeowners who only have a small amount of equity in their existing home can struggle to move home or get a good remortgage deal. The mortgage guarantee scheme can also help people in this situation. 

To be eligible for the scheme your mortgage should: 

  • be for your main home, not for a second home or buy to let property

  • be for a home that costs no more than £600,000

  • be for you as an individual (or with someone else) but not for an incorporated company

  • have an LTV of between 91% and 95%

  • be a repayment mortgage, not interest only

The normal mortgage affordability rules still apply, and it will help if you have a good credit score.

What kind of property you can buy with the 5% deposit mortgage guarantee scheme

You can use the mortgage guarantee scheme to buy a new build or an existing property.

This is different from the Help to Buy scheme which is only available for people buying new build homes.

How long will the 5% deposit mortgage guarantee scheme be available?

The scheme will be available from April 2021 up until December 2022.

It’s a temporary response to the low number of high LTV mortgages currently on the market. This is because of the coronavirus pandemic and its effect on the housing market.

The government will consider whether to keep the scheme open closer to the end date of December 2022.

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Your home could be repossessed if you don't keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

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Sources

¹ HM Treasury: Mortgage Guarantee Scheme Outline