5th March 2025

The 5% deposit mortgage scheme: What it means for homebuyers | WIS Mortgages

It's no secret that the property market in the UK has become quite competitive in the past few years, with house prices continuing to rise. This environment is particularly challenging for first-time buyers, who also need to factor in substantial deposits to acquire a mortgage. Thankfully, the introduction of the 5 % mortgage scheme has laid out a path that looks to make things a little easier for potential homeowners. In this article, we'll learn more about the 5 % deposit mortgage scheme and what it means for homebuyers.

What is the 5% Deposit Mortgage Scheme?

The 5% deposit mortgage scheme - also known as the 95% mortgage scheme - is a government initiative designed to help more people get onto the property ladder by reducing the initial financial barrier of purchasing a home.

Under the scheme, homebuyers are only required to provide a deposit of 5% of the purchase price of their home, with the mortgage covering the remaining 95%. This is a significant reduction from the more typical 10-20% deposit requirements, making homeownership more accessible to a larger number of people by establishing a minimum deposit for a mortgage.

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Key Features of the Scheme

The 5 % deposit mortgage scheme has a few key features that make it both appealing and practical for prospective homeowners. Some of the main aspects that you should be aware of include:

• Eligibility: The scheme is mainly targeted at first-time buyers, although previous homeowners struggling to re-enter the market are also eligible. Provided you are using the scheme to purchase a main residential property, you should be able to use this scheme.
• Property Types: It generally applies to existing homes only, as all lenders involved are not allowing them to be used on new-build properties. The value of the property must be £600,000 or less.
• Loan Security: To mitigate the risk posed by higher loan-to-value (LTV) ratios, the government often provides a guarantee to lenders, securing a portion of the loan against default.
• Deposit Amount: To enter the scheme, you must have a deposit saved up that falls between 5% and 9% of the property purchase price. In other words, you will need to have a mortgage LTV between 91% and 95%.

Benefits for Homebuyers

The 5% deposit mortgage scheme is designed to offer a wealth of benefits to prospective homebuyers by making homeownership more accessible. Some of the main advantages that this scheme provides include:

Lower Deposit Requirement

The most obvious benefit of the 5% deposit scheme is the reduced amount of savings required to secure a home. This opens up homeownership to individuals and families who may have solid incomes but struggle to save large sums, particularly in high-cost areas.

Enhanced Buying Power

With the need for a smaller deposit, potential buyers might be able to purchase a home sooner than they otherwise could or look at properties that were previously out of their financial reach, increasing their buying power and options. This is a great way to encourage first-time buyers to enter the market earlier than they previously could have.

Stimulating the Property Market

By increasing the number of potential homebuyers, the scheme can stimulate demand in the property market, potentially stabilising or even driving up property values in certain areas. This can benefit the economy as a whole, encouraging new housing developments and associated industries.

Considerations and Risks

Although the 5 % deposit scheme can be a huge boon for many looking to purchase a home, it isn't always the right option. Before forging ahead with this scheme, it's important to consider your circumstances and the potential risks associated with it. Below are a few things for you to factor into your decision before signing up for this scheme:

Higher Monthly Payments

While a smaller deposit is appealing, it does mean that the mortgage balance will be higher, which can lead to higher monthly repayments. Buyers should ensure they can comfortably meet these payments before committing to a loan. If you can afford a higher deposit, it might be worth considering as it could make things easier for you down the road.

Interest Rates and Loan Terms

Mortgages with high LTV ratios, like those under the 5% deposit scheme, often come with higher interest rates. Homebuyers should compare different mortgage products to find the most cost-effective option over the life of the loan.

Market Fluctuations

There's an inherent risk in entering the housing market with a small deposit. If house prices fall, homeowners could find themselves in negative equity, where the value of their home is less than the mortgage owed. This situation can make it difficult to refinance or sell the property if needed.

Is the 5% Deposit Mortgage Scheme Right for You?

The 5% deposit mortgage scheme is a major push in government policy that looks to support homebuyers in the UK, particularly benefiting those who have been priced out of the market. While the scheme offers substantial opportunities for first-time buyers and those struggling to accumulate large deposits, it also comes with its own set of risks and challenges. Prospective buyers should carefully consider their financial stability and long-term commitments before entering into such agreements

For those who can benefit from the scheme, however, it could be the key to unlocking the door to their new home, marking a pivotal step towards achieving their dream of homeownership. If you have any questions about securing a mortgage through this scheme, please get in touch with our team at WIS Mortgages today.

As a mortgage is secured against your home it may be repossessed if you do not keep up the mortgage repayments.

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Frequently Asked Questions

Q. Who is eligible for the 5% deposit mortgage scheme?

A. The 5% deposit mortgage scheme is primarily aimed at homebuyers in the UK who are struggling to afford standard mortgages. It isn't specifically for first-time buyers - but the property you're looking to purchase must be your main residence.

Q. What types of properties are included in the scheme?

A. The scheme typically includes existing homes only. Lenders are currently only offering mortgages via this scheme to existing properties, which means that new-builds are excluded. What's more, the value of the property in question must be less than £600,000.

Q. How does the 5% deposit compare to other types of mortgages?

A. Traditionally, most mortgages require a higher deposit, typically 10-20% of the property's value, which acts as a buffer for lenders against drops in property prices. The 5% deposit mortgage lowers this barrier, enabling more people to buy homes, but usually comes with higher interest rates and potentially more stringent credit requirements.

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