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Mortgage with a low deposit

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HomeFirst Time BuyersMortgage with a low deposit

Mortgage with a low deposit

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Last reviewed on 16th March 2022

The rush to get onto the housing ladder is more evident now than ever before. The government are encouraging this trend and lenders have also started to offer 95% mortgages to those with low deposits. As a result, low deposit mortgages are possible and you may even receive help from the government.

There are different schemes that you may be eligible for, but choosing what suits you isn’t always easy. Our experts are on hand to help you further if needed.

What is a 95% mortgage?

A 95% mortgage allows you to buy a property with a 5% deposit, as the other 95% is borrowed. To clarify, if you have a 5% deposit, you’ll need a 95% LTV mortgage. If you have a 10% deposit, then you’ll need a 90% mortgage and so on. LTV is simply an abbreviation for Loan to Value.

It’s important to understand your LTV because it has a direct link to the mortgage rates you’ll be offered. High LTV mortgages such as an 85% loan to value and above, tend to have higher rates when compared to low LTV mortgages, such as 75% and below. This is because lenders are taking a lot more risk when lending 95% of the property value in comparison with 75% of the property value.

If the value of a property decreases, then lenders are left with few options and as a buyer, you could face being in negative equity. Just to recap, getting a mortgage with a small deposit is possible but the rates won’t be the best. Using a larger deposit often unlocks better rates. In addition, other government schemes such as Help to Buy also offer incentives that allow you to buy a property with a small deposit.

What is the mortgage guarantee scheme?

This scheme allows you to purchase a home with a 5% deposit on properties up to £600,000. The government will underwrite the remaining 95%. With the introduction of the scheme, getting a mortgage with a small deposit is perhaps easier now than ever before. If you require tailored advice, speak to an advisor that can help you with your options.

The mortgage guarantee scheme was launched in April 2021 and include lenders such as:

  • Natwest
  • Virgin Money
  • Lloyds Bank
  • Santander
  • Barclays
  • HSBC

The scheme is available to all home buyers and isn’t only for first-time buyers. Mainstream lenders are set to join others in the scheme, as the government is essentially acting as a guarantee.

This means that if you’re unable to repay your mortgage or go into negative equity, lenders have security in the form of a government guarantee. Lenders will still need to carry out a mortgage assessment, such as credit checks and affordability assessments.

Although it’s easier to get a mortgage with a small deposit, the process is still the same. If you have a low income or bad credit, it’s likely you’ll require specialist mortgage advice.

Pros and cons of low deposit mortgages

Pros

  • Saving for a low deposit is easier and less time consuming
  • There are schemes which are designed for low deposit mortgages
  • 95% mortgages may not be around forever
  • Can help you to buy a home where you’d otherwise struggle

Cons

  • Low deposit mortgages often have higher rates and fees so they can be expensive
  • There are less lenders that offer 95% mortgages, so your options may be limited
  • If property prices fall, the risk of being in negative equity is higher with smaller deposits
  • Some schemes have certain conditions that you must meet in order to qualify

Can I use a government scheme to buy a home?

Government home buying schemes such as Help to Buy have proven successful in recent years. Many first-time buyers simply wouldn’t be homeowners if this scheme didn’t exist and that’s exactly why such schemes were created. Getting a 95% mortgage can be made easier by using a scheme, so it may well be something to consider.

Can I get a 95% mortgage with the Help to Buy scheme?

Help to buy can allow you to buy a home with a 5% deposit. The only Help to Buy scheme that can allow you to do this is the Help to Buy: Equity Loan.

The Equity Loan is calculated at 20% of the property value, which is provided by the government. In addition to your 5% deposit, this then makes up a 25% deposit. This is great as you can then search for 75% LTV mortgages which often have better rates when compared to 95% mortgages.

ask a mortgage broker

Can I borrow a mortgage deposit from a family member?

If you’re struggling to save for a deposit, then you may want to consider using a gifted deposit. Some lenders accept gifted deposits, but there are guidelines on how to gift a deposit properly. You can’t technically ‘borrow’ a deposit from a family member, but it can be ‘gifted’.

Gifted deposits must be given and not loaned. Lenders will also need to see evidence of this in writing, signed by the person helping you. It must be clear that your helper has no interest in the property and it doesn’t constitute any rights of ownership.

The reason deposits must be gifted and not loaned is because lenders and all parties concerned know exactly where they stand. The last thing a lender wants is for somebody to ask for their deposit back. This is why a signed document outlining the gift is crucial.

Read more about mortgages with gifted deposits here.

Are there other alternatives for low mortgage deposits?

There are other options that allow family and even friends to help if you’re struggling to save a substantial deposit. Rather than gifting funds, family members can transfer funds into a bank account held by your lender.

Lenders typically require 10% of the overall property value to be deposited into a savings account. The incentive here is that the person helping you will get their money back after the initial mortgage term which is either three or five years. These types of mortgages are known as family mortgages. Lenders may even lend up to 100% of the property value so you won’t need a deposit at all.

Using an unsecured loan for a mortgage deposit

Whilst the majority of lenders will insist that you save up for a deposit, it is possible to borrow your deposit in the form of an unsecured loan. If you do choose to use this route, then it’s important to apply with lenders that accept mortgage deposits from unsecured loans.

Unsecured loans are generally used by investors who know that they can profit from buying and selling a property. Loans are then repaid before any interest is charged. This will only work on deals that offer 0% for a set period of time, such as credit facilities.

First-time buyers can still use an unsecured loan but the loan will need to be repaid. As there’s not an asset waiting to be sold, you will need to find a means of repaying the loan. In addition to this, you’ll need a favourable credit limit and clean credit history.

Advice on getting a mortgage with a small deposit

If you need a mortgage but feel as though your deposit may not be enough, don’t give up hope. Speak to a specialist and check if you’re eligible for a mortgage.

Even if your deposit amount is deemed too small, our advisors can talk you through the exact amounts you’ll need. Speaking to an expert can make all the difference in being accepted for a mortgage, so do get in touch.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.

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