Saving enough for a deposit is often one of the biggest obstacles to homeownership, especially during the ongoing cost of living crisis.
According to Statista, 45% of UK households reported an increase in living costs by the end of July 2024.
5% mortgage options aim to tackle this challenge by reducing the upfront financial burden and making homeownership more accessible.
These mortgages allow you to borrow up to 95% of the property’s value, meaning you only need to save a 5% deposit.
Read on to learn more about 5 per cent mortgage options and how they can help you get onto the property ladder.
What is a 5% Mortgage?
A 5% mortgage, also known as a 95% loan to value (LTV) mortgage, allows you to purchase a property with a deposit as low as 5% of the property’s value. The lender covers the remaining 95% with a mortgage loan.
For example, if you’re buying a house worth £200,000, you would need a £10,000 deposit (5% of £200,000), while the mortgage covers the remaining £190,000.
This is the lowest deposit most lenders will accept, but not all lenders offer 95% LTV loans. Various low-deposit options are available, and the best choice for you will depend on your personal circumstances and the property you wish to buy.
Which 5 Percent Mortgage Options Are Available in the UK?
You can access a 5% mortgage through several different schemes and avenues:
1. The Mortgage Guarantee Scheme
Launched in 2021, the Mortgage Guarantee Scheme is a government initiative designed to encourage lenders to offer 5% mortgages.
The government guarantees a portion of the loan in the event of borrower default, providing lenders with more confidence to offer 95% LTV mortgages.
The scheme is set to run until 30 June 2025 and is available to first-time buyers, previous homeowners, and home movers.
These mortgages are similar to standard 95% LTV mortgages and require no extra paperwork.
To qualify, the following criteria must be met:
- A deposit of 5% to 9% of the property’s value
- The property’s value must not exceed £600,000
- You must be buying a primary residence, not a buy-to-let or second home
- The property must not be a new build
- You’re applying as an individual, not a business
- The mortgage must be on a repayment basis, not interest-only
2. Shared Ownership
The Shared Ownership scheme allows you to buy a portion of a property and pay rent on the remaining share, offering an affordable route to homeownership with a small deposit.
Typically, you can buy a share of between 10% and 75% of the property and take out a mortgage or use savings for the portion you purchase.
With shared ownership, you only need to pay a deposit on the share you’re buying, making it easier to afford. For example, a 5% to 10% deposit on the portion you own may be enough to secure a mortgage.
Eligibility criteria for Shared Ownership include:
- A household income of £80,000 or less (£90,000 or less in London)
- Being unable to afford a deposit and full mortgage payments for a home that meets your needs
One of the following must also apply:
- You’re a first-time buyer
- You previously owned a home but can’t currently afford one
- You’re moving due to changes in circumstances, such as a relationship breakdown
3. First Homes Scheme
The First Homes Scheme offers first-time buyers the chance to buy a home at 30% to 50% below market value, depending on the local council’s discretion.
This discounted price makes it easier to access a 5% mortgage, as the lower purchase price improves the LTV ratio.
The scheme applies to both newbuild homes and properties sold through the scheme by previous owners.
The homes must be located in England, and eligibility requirements include:
- You must be a first-time buyer
- Be 18 years or older
- Earn no more than £80,000 a year before tax (£90,000 in London)
The discounted property must cost no more than £250,000 (£420,000 in London)
4. Guarantor Mortgage
A guarantor mortgage can make a 5% mortgage more viable by reducing the lender’s risk. A family member acts as a guarantor, stepping in to cover repayments if you’re unable to.
In some cases, a guarantor can even help you access a 100% LTV mortgage, meaning no deposit is required.
The guarantor may secure the loan against a property they own or deposit a lump sum into a savings account held by the lender.
The guarantor must prove they can afford the entire mortgage and will be liable for payments if necessary.
What Are the Interest Rates for 5% Mortgage Options?
Since 5 per cent mortgages involve the lowest deposit that lenders will approve, they typically come with higher interest rates.
Lenders see low deposit mortgages as higher risk, so they increase the rates on these products to protect themselves.
Final Thoughts
A 5% mortgage can be an excellent solution for those struggling to save for a large deposit, especially with the various schemes available in the UK.
Whether you opt for the Mortgage Guarantee Scheme, Shared Ownership, or the First Homes Scheme, there are multiple avenues to make homeownership more achievable.
If you’re unsure which option is best for you, consulting a mortgage broker experienced in low-deposit mortgages can help you navigate the process and find the best deal based on your unique situation.
Call us today on 03330 90 60 30 or contact us to speak to one of our friendly advisors.
Sources and References:
- [Statista Cost of Living Increase](https://www.statista.com/statistics/1300280/greatbritaincostoflivingincrease/)
- [First Homes Scheme GOV.UK](https://www.gov.uk/firsthomesscheme)
