Buying a home is the dream for many. The issue that many people face – being able to afford it. This is where the 5% deposit scheme comes into play.
This scheme makes it a lot easier for people to buy their first property. This also makes it easier for people to move homes.
Below I will give a quick summary of who this scheme works for. What are the criteria to be able to benefit from it. I will also cover some of the potential issues you might find with this scheme.
what is a 5% deposit scheme?
5% deposit scheme is a normal repayment mortgage people apply for. The only difference here is – you are able to apply for a mortgage while having a very little deposit available to you.
As lately house prices have been climbing at crazy pace – government has been looking into ways to make it more affordable for people to become home owners. As deposit is one of the biggest costs to buy a new place – government acts as a partial guarantor.
In case the lender loses money – this loss will partially be offset be the government.
This scheme was due to finish in December 2022. The government however announced that this scheme will now be extended by a further year. One of the potential reasons to this – the slowdown we are currently seeing in the property market.
By offering more affordable mortgages – the government is trying to keep the property market alive.
who can apply for 5% deposit?
The scheme is available to those buying their first property or moving their home. You can’t use the scheme if you are looking for an investment property. The scheme also excludes people looking to buy a second home.
On top of the above – the property you re buying has to cost no more than £600,000. I would suggest that this amount should work for majority of people struggling with a deposit. I doubt people would be looking to buy a multimillion property if they don’t have a deposit.
If the above applies to you – the last step is to get approved by the lender. They will look at things like affordability, credit history, your regular expenses and so on.
One other thing to keep in mind – the property can’t be a new-build. This is in place as these types of properties can more often lose significant value. Lenders want to avoid this happening to the properties they own.
Before applying – I would encourage you to play with an online mortgage calculator. See how far does your budget stretch. Try to understand what would the monthly payments look like if interest rates keep climbing further.
why are 5% deposits bad?
The biggest issue I see with this scheme – it’s the LTV. For those who have’t come across this term before – it is Loan-To-Value.
There is a simple rule – the higher the LTV, the more interest you are charged. Most lenders will reduce the interest rate they charge in the increments of 5% of reduction of LTV. This is the case all the way down to 60%.
Since the scheme is in place to help people buy properties – I struggle to understand that the same people will be charged the highest interest. This as a result makes it less likely that someone can actually afford to buy a home.
You might ask – is the interest really that different for someone with 5% and 40% deposit. The difference in the interest can be slightly over 1%.
While this might not sound that much – if we look at a mortgage balance of £300,000 paid over 25 year and apply a 4.3% and 5.3% interest rates the results are really sizeable.
In the first instance – the monthly payments would be at just over £1,630 per month. 5.3% monthly payments would stand at just over £1,800. That’s an overpayment of £170 each month for a person who is struggling with saving up for a deposit.
What’s even worse – the person with the interest rate of 5.3% would pay over extra £50,000 over the lifetime of the mortgage.
summary
Don’t get me wrong – the 5% mortgage scheme is an amazing way for many to get onto the property ladder.
It is however worth keeping the LTV issue in mind. Have a chat with a mortgage advisor and understand your options. These are the guys I have used myself.
Have a look into your budget and see if there is a way you could increase your deposit to get into a lower LTV bracket. One thing to always keep in mind – make sure the mortgage is affordable and you will be able to keep up repaying it.