Residential property specialist, Victoria Cranwell, examines the Government’s low-deposit mortgage scheme, which is launched today.
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Seven weeks after it was announced in the Budget, the Chancellor’s low-deposit mortgage scheme today becomes a reality. The scheme is aimed at helping first-time buyers or current homeowners secure a mortgage with just a 5% deposit.
The number of low-deposit products fell substantially last year as lenders sought to reduce their exposure to risk during the early months of the pandemic. This resulted in frustration for many potential buyers who were unable to secure a mortgage as the housing market soared following the announcement of the Stamp Duty holiday.
How does the low-deposit mortgage scheme work?
The scheme is open to anyone buying a home costing up to £600,000, but is not available for buy-to-let or second homes. The Government will offer a partial guarantee, generally 15%, to compensate lenders if the borrower defaults.
In late March, the Yorkshire Building Society became the first mainstream lender to announce they were on board, with the Skipton Building Society hot on their heels. This week, HSBC, Santander, Lloyds, Barclays and NatWest will join them, with Virgin Money to do so from May.
New build exclusion
However, some major lenders such as Barclays and Halifax have announced that these products will not be available to buyers of new-build properties, citing concerns over price inflation. This has prompted warnings from some major housebuilders of a potential drop in the supply of new homes.
Caution by lenders around new-build homes has led to concern that the low deposit scheme will have a far more limited impact than envisaged.
Low-deposit mortgage interest rates
While the new scheme may help you to secure a mortgage, you should not expect to secure the best deal in terms of interest rate. Despite the Government’s guarantee, mortgage lenders still consider high loan to value mortgages riskier, and this is reflected in the rates available. Expect to pay close to 4% for a two-year fixed-rate deal. To put that in context, if you can stretch to a 10% deposit, you are likely to pay around 0.75% less for a similar two-year deal.