Several major mortgage lenders are taking part in a Government guarantee scheme, where house-hunting people can gain access to 95% mortgages.

The scheme, which is due to run until mid-2025, has been designed to increase the number of deals that are available for want-to-be homeowners with a low deposit or limited equity.

However, these should not be classed as ‘special mortgages’ – and it also needs to be pointed out that they are certainly not the cheapest. Here’s what you need to know (including the pros and cons of going down this particular mortgage route):

Under the scheme, a buyer with a 5% deposit has access to 95% loan-to-value mortgages (meaning the loan is for 95% of the property’s value).

The 95% mortgage operates as any standard mortgage would for the buyer. As far as the buyer is concerned, there is no difference between a 95% mortgage offered through this scheme and a 95% mortgage offered outside this scheme.

For the mortgage lender however, the scheme guarantees that the Government will bear some of the cost if the lender loses money. For example, if the borrower fails to keep up with mortgage payments and the property is repossessed, but the subsequent property sale does not recoup the outstanding mortgage amount.

For a buyer looking into a 95% mortgage, here’s the rundown of the key pros and cons:

Pros:

1. Lower Initial Cost: One of the biggest advantages of a 5% deposit is that it allows homebuyers to get onto the property ladder with a relatively lower initial cost compared to higher deposit requirements. This can make home ownership more accessible to first-time buyers or those with limited savings.
2. Quicker Entry to the Housing Market: With a lower deposit requirement, prospective homebuyers can enter the housing market sooner rather than waiting to save up a larger deposit, which can take years.
3. Access to a Wide Range of Mortgage Deals: Many mortgage lenders in the UK offer products specifically tailored for buyers with a 5% deposit. This means you have more options to choose from and can select a mortgage deal that suits your financial situation.
4. Potential for Property Appreciation: By getting into the property market earlier, you have the potential to benefit from any increase in property values over time, allowing you to build equity in your home.

Cons:

1. Higher Monthly Repayments: With a smaller deposit, the loan-to-value (LTV) ratio of your mortgage is higher, which typically results in higher monthly mortgage payments. This can put a strain on your monthly budget, especially if interest rates rise or if there are other unexpected expenses.
2. Risk of Negative Equity: If property prices fall after you purchase your home, there is a risk that your mortgage debt could exceed the value of your property, leaving you in negative equity. This can make it difficult to sell your property or remortgage if needed.
3. Limited Mortgage Options: While there are mortgage products available for buyers with a 5% deposit, the range of options may be more limited compared to those available for buyers with larger deposits. Additionally, interest rates on these mortgages may be higher, resulting in increased long-term costs.
4. Possibility of Higher Interest Rates: Lenders may charge higher interest rates or fees for mortgages with lower deposits, as they perceive these loans to be higher risk. This can result in paying more interest over the life of the mortgage compared to if you had a larger deposit.
5. Potential for Rejection: Lenders may be more cautious when considering mortgage applications with a lower deposit, especially during times of economic uncertainty. This means there’s a chance your mortgage application could be rejected or you may be offered less favourable terms.

And according to a new report issued by the Building Societies Association (BSA), first time buyers are facing the toughest conditions in 70 years to buy a home.

Those buying a first home were increasingly reliant on having two high incomes or receiving parental support, the report stated. Others have been priced out and ‘stuck’ in renting from private landlords.

Are you looking to buy your first home? Our experienced mortgage brokers have access to the whole of the market, helping you to secure the most favourable rates currently out there. They can assist you every step of the process, ensuring that you feel confident and supported along the way. Book a free online consultation here: https://outlook.office365.com/book/[email protected]/