Low-deposit mortgages

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Guide to low-deposit mortgages

Scraping together enough money for a mortgage deposit on your first home can seem pretty daunting.

Even if you’re an existing homeowner you might struggle. For example, if you have low equity because the value of your current home has fallen since you bought it.

With low-deposit mortgages you can borrow around 90%-95% of the property’s value, so you'll only need a small deposit.

Low-deposit mortgages are now more widely available after the government launched its mortgage guarantee scheme in April 2021.

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What is the mortgage guarantee scheme?

The mortgage guarantee scheme is designed to help home buyers get a mortgage with only a 5%-9% deposit.

For example, the average UK house price was £256,000 in March 2021, according to the Office for National Statistics. So you’d need to put down at least a 5% deposit of £12,800, and take out a 95% mortgage for the remaining £243,200.

The scheme will run until December 2022 and it’s available to both first time buyers and home movers. The property you're buying must be your main residence and worth up to £600,000. It’s not available for second homes, by-to-let properties or new builds.

Interest rates vary between lenders and it’s only available for repayment mortgages, so you wouldn’t be able to benefit from the scheme if you wanted an interest-only mortgage.

You’ll still need to pass the lender’s usual affordability checks to be eligible.

How do I apply for a low-deposit mortgage?

You can start by giving a few details about your circumstances, your income and your expenses. Once you've done that, you'll see some mortgage options for you and you'll get a ‘decision in principle’ to download.

You can then start looking for your new home, if you haven’t found it already.

Once your offer is accepted on your new home, you’ll need to make a formal mortgage application. The lender will assess the property to make sure it’s worth what you’re paying for it.

There will be more affordability testing, like a loan-to-income check – to make sure you can afford the mortgage repayments – and an in-depth credit score analysis which gives lenders an idea of your credit history and reliability.

If your application is accepted, you’ll be formally offered a mortgage and can proceed with buying your new property.

Pros and cons of low deposit mortgages

Pros

  • You’ll be able to buy your home sooner as you don’t need to save up for a larger deposit
  • The small deposit could also make things easier for home movers that have a low equity in their current home
  • The mortgage guarantee scheme means that more low deposit mortgages will be available without you having to pay a mortgage indemnity guarantee (MIG). A MIG is an insurance policy that you the borrower has to pay for, but it protects the lender against you defaulting on your mortgage. They can be expensive and might be built into your mortgage fees, pushing up costs

Cons

  • Potentially higher interest rates and fees, because you’re borrowing more money so the risk for the lender is greater – although the mortgage guarantee scheme is designed to remove some of this risk to lenders and keep prices down
  • Less choice as not all lenders offer low deposit mortgages
  • If house prices fall, you might end up paying off a mortgage that’s costlier than your home (this is called being in negative equity)

Am I eligible to apply for a low-deposit mortgage?

Anybody can apply for a low-deposit mortgage, but there's no guarantee you’ll be accepted. Each application rejection can negatively affect your credit report, so you shouldn't just keep applying again and again.

To be eligible for a low-deposit mortgage, you’ll have to meet the lender’s criteria.

The best way to increase your chances of being accepted is to use a mortgage advisor. They'll be able to match you up to a mortgage you're more likely to be accepted for.

How much can I borrow with a 95% mortgage?

How much you can borrow depends on what’s affordable for you. As a rule of thumb, you should be looking to spend no more than 25% of your pre-tax income on your mortgage repayments.

Try our mortgage calculator to find out how much your monthly repayments might be, or try our mortgage deposit calculator.

Types of low deposit mortgage

You need to decide whether to opt for a fixed rate – typically for two years or five years – or alternatively to apply for a variable-rate mortgage.

Fixed rate

If you’re looking for peace of mind that your monthly repayments won't change, a fixed-rate mortgage may be best.

You’ll know exactly how much your payments will cost each month, helping you budget for your mortgage.

On the other hand, you might face steep early repayment charges if you want to end or change your product early, for instance, if you sell up, move house or want to make a large overpayment.

Variable rate

Variable rate mortgages sometimes have lower rates than fixed-rate mortgages in the short term, but you need to remember that this could change.

Most variable rates are tracker mortgages, which means they track the bank’s standard variable rate, plus or minus a set percentage.

Just because a mortgage is a tracker rate doesn’t mean you can switch at any time – just as with fixed-rate mortgages, many will have an initial term, typically of two years, and you’ll probably face early repayment charges if you repay or switch products within that time.

Alternatives to a low-deposit mortgage

Low-deposit mortgages are mostly aimed at those on government initiatives, like Shared Ownership, Help to Buy and the mortgage guarantee scheme.

The only real alternative to a low-deposit mortgage is to wait a while and save a higher deposit amount. You might have more choice, plus interest rates and fees could be more competitive.

Frequently asked questions

Loan-to-value (LTV) represents the amount a lender is willing to let you borrow, compared to the value of the property you’re looking to buy.

For example, if you’re interested in a home worth £200,000, your lender might offer you a 95% LTV mortgage. This means they’ll lend you £190,000 towards the purchase of the property, and you must provide the remaining 5% (£10,000).

It could make getting a low-deposit mortgage with a reasonable interest rate more tricky, but some lenders specialise in mortgages for those with poor credit.

The only mortgage without a deposit available is a guarantor mortgage where someone agrees to meet your repayments if you don’t. They’re not widely available and you’ll usually need a good credit score.

Yes, a family member can gift you the deposit, as long as there’s no agreement that you’d have to pay it back.

If you're a family member that has a mortgage with the same lender, you might be able to borrow against the equity in your home and gift some or all of it to the prospective home buyer to use for the deposit.

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

PLEASE NOTE: THE FCA DOES NOT REGULATE MOST BUY TO LET MORTGAGES.

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