UK banks launch 95% mortgages: Everything you need to know

LaToya Harding
·5 min read
STOKE-ON-TRENT, ENGLAND - MARCH 03: Placards from various estates agents advertising properties To Let , For Sale and Sold on March 03, 2021 in Stoke-on-Trent, England. UK Chancellor, Rishi Sunak, announced the return of 95% mortgages to help first-time buyers. He also announced that house buyers would be exempt from paying stamp duty for a further three months with the scheme ending on 31st June 2021. (Photo by Nathan Stirk/Getty Images)
The scheme forms part of a range of ownership options to help people get on the housing ladder, amid a rise in demand during lockdown. Official statistics shows that more homes were delivered in 2020 than in any year since 1987.Photo: Nathan Stirk/Getty Images

A new government-backed mortgage scheme has launched in the UK which will help first-time buyers, or current homeowners, secure a mortgage with just a 5% deposit.

The scheme follows prime minister Boris Johnson’s pledge to help turn “generation rent into generation buy” at the Conservatives’ party conference last October.

He said new reforms would mark the “biggest expansion of home ownership since the 1980s,” in a nod to former Conservative leader Margaret Thatcher’s totemic right-to-buy policy in that decade.

It forms part of a range of ownership options to help people get on the housing ladder, amid a rise in demand during lockdown. Official statistics shows that more homes were delivered in 2020 than in any year since 1987.

The launch also comes as a bid to “further strengthen the government’s commitment to supporting the housing sector”, as it aims to tackle inequality and level up the country.

What are they?

95% mortgages mean that first-time buyers or current homeowners are able to secure a mortgage with just a 5% deposit for a house up to the value of £600,000 ($838,695).

The UK government will offer lenders the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.

The scheme is intended as a temporary measure in response to the pandemic, and will be open for new mortgage applications from April 2021 to December 2022.

The government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80% of the purchase value of the guaranteed property.

It will also review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.

WATCH: How much money do I need to buy a house?

Why have they been launched?

The new scheme has been launched to help make home ownership more affordable and accessible for aspiring home-owners.

It was first unveiled at the March budget, where chancellor Rishi Sunak also extended a stamp duty holiday in England and Northern Ireland in response to the coronavirus pandemic.

The COVID-19 crisis has led to a reduction in the availability of high loan-to-value (LTV) mortgage products, particularly for prospective homebuyers with only a 5% deposit, leaving many households unable to get on to the housing ladder.

Low-deposit mortgage availability has shrunk since the pandemic hit amid rising unemployment, increased lender caution and record high property prices.

Earlier this year the Treasury said there were only 8 low-deposit products available nationwide in January 2021.

READ MORE: Budget 2021: Stamp duty cuts extended and 5% deposit mortgages from April

Since 2010, more than 663,000 households have been helped into home ownership through government schemes, however, 69% of private renters and 63% of those living at home who had looked into a mortgage said they could not find many mortgages with a low deposit.

“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,” Housing Secretary Rt Hon Robert Jenrick MP said.

Who's offering them?

The 95% mortgage guarantee is available from lenders on high streets across the country, with Lloyds Banking Group (LLOY.L), Santander (BNC.L), Barclays (BARC.L), HSBC (HSBA.L) and NatWest (NWG.L) launching mortgages under the scheme today.

Virgin Money is expected to follow from next month.

However, some lenders such as Barclays and Halifax, which is part of Lloyds, have said that these products will not be available for new-build properties.

What are the benefits?

The main advantage for 95% mortgages is that you only need to have a deposit of 5% of the home’s purchase price.

Demand for new lower-deposit mortgages is expected to be high over the next year as it is more affordable to a wide range of people.

Miguel Sard, managing director of home buying and ownership at NatWest said: “For those customers, particularly younger or first-time buyers, saving up for a big deposit can often be difficult, and we know people in these groups are some of the hardest hit by the effects of the pandemic.

“A government-backed scheme will help segments of the market for whom home ownership has felt far out of reach in recent months.”

READ MORE: Generation Buy: What low-deposit mortgage plans mean for buyers

What are the risks?

The launch comes at a time that average house prices in the UK are rising to record levels, and people opting for the 95% scheme could be paying more, particularly if they are paying higher lending charges and higher interest rates on the loan.

A smaller deposit will still mean that choice of mortgages will be more limited, and some analysts have suggested that cheaper deals are available for those able to stretch to a 10% deposit.

The scheme also means that the UK government could be exposed to substantial losses if borrowers struggle to keep up their payments, or if the housing market crashes — which some economists expect this year.

Under the previous scheme, the UK government offered to pay banks up to 15% of the value of properties if a home was repossessed and sold for less than the outstanding loan.

WATCH: What do stamp duty cuts mean for buyers and house prices?