Credit Building > How do 5% deposit mortgages work?

How do 5% deposit mortgages work?

Wollit Team3 minute read · Updated 30th June 2024

A 5% deposit mortgage allows you to get a mortgage for a property with a minimum deposit of 5%.

For example, if you are buying a property valued at £200,000, with a £10,000 deposit, the remaining 95% will be covered by the mortgage.

The £200,000 is the value of the property, while the remaining £190,000 is the loan that you need to get.

Because of this, these 5% deposit mortgages are also sometimes called “95% loan to value mortgages”, “95% LTV mortgages”, or simply “95% mortgages”.

These mortgages are great if you can only afford a small deposit since they enable you to own a property sooner instead of waiting and saving for a larger deposit.

More importantly, 5% mortgages also benefit from the UK Government’s mortgage guarantee scheme.

How does the Government Mortgage Guarantee Scheme work?

The Mortgage Guarantee Scheme allows home buyers to get a mortgage with just a 5% deposit. This means that the government will guarantee 95% of the mortgage, so lenders are more willing to offer these types of mortgages.

Here is what you need to know:

The scheme was introduced in 2021 and will be running until June 2025;
It's available to all home buyers, not just first-time buyers;
Homes can be worth up to £600,000;
Major banks like Barclays, HSBC, NatWest, Santander, and Virgin Money have agreed to offer these 95% mortgages through the scheme.

However, while the government is guaranteeing most of the mortgage, that doesn't mean you're automatically approved. Lenders will still look carefully at your credit history and score. The government guarantee just makes them more willing to offer you a mortgage.

What are the pros and cons of a 5% deposit mortgage?

Some of the obvious pros:

The scheme allows you to buy a home sooner, without having to save a large deposit first.
As a first-time buyer, a 95% mortgage is probably your best bet to get on the property ladder.
The UK's mortgage guarantee scheme also means that lenders are encouraged to offer you a mortgage even if you only have a low deposit.
You may even discover that taking out a 95% mortgage results in cheaper monthly instalments compared to your rent, especially if you choose a longer loan term.

However, there are some drawbacks to consider:

Your monthly interest charges and mortgage payments will be higher compared to lower LTV mortgages.
You’ll have fewer deals to choose from.
Borrowing with a higher LTV carries the risk of negative equity if the property's value falls below the mortgage amount, leaving you owing more than the property's worth.
It may take longer to qualify for competitive rates when remortgaging, especially if property values have not increased or have decreased.
There is also a risk that lenders may undervalue the property compared to the offer you made.
When you borrow with an LTV of 90% or more, lenders may ask you to pay a higher lending charge (HLC) to protect themselves in case you default on the mortgage.

How can I qualify for a 5% deposit mortgage?

To be eligible for a 5% deposit mortgage in the UK, you typically need to meet the following criteria:

You must be a UK resident.
You must be at least 18 years old.
You must have a minimum deposit of 5% of the property's value.
You must be buying a pre-owned property. However, you can use Deposit Unlock to buy a newly built property.
The lease term of the flat must be at least 90 years.
You cannot buy a property with the Shared Ownership scheme.
You cannot buy a property with a Restricted Resale Price.
And you cannot borrow more if you are remortgaging.

These criteria apply in general but keep in mind that some lenders may have additional restrictions, such as not offering 5% deposit mortgages to self-employed borrowers.

You might also want to know that while 5% deposit mortgages are available, the number of deals has decreased in recent years, especially as government support is winding down.

That’s why if you still want to apply for a 5% deposit mortgage, the best thing is to work on your credit score. This will both give you more options and increase your chances of approval so you don’t miss out.

The good news is that many apps can help you build and improve credit. One of them is Wollit.

Wollit is an app available on both Android and iOS. It works by reporting a fixed-fee monthly subscription as a loan repayment to all credit reference agencies. This helps you build a history of timely debt repayments, which is the main factor that matters for your credit score.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders you pay your bills on time, helping you make the most of your rent while you prepare to become a homeowner.