B-Advised Blog

5% Deposit Mortgages: Everything You Need To Know

12/04/2022

Today, we’re going to be taking a look at the pros and cons of high loan-to-value mortgages for first time buyers, as it’s important that you’re well versed in what a 5% deposit mortgages could mean for you. 

For first-time-buyers, saving the deposit needed in order to buy a property can be a long and arduous process. That’s certainly no secret. 

With property prices ever on the increase, the amount needed for a deposit is constantly hiking up, too. As it currently stands, a 5% deposit is, ultimately, as much as many first-time-buyers can realistically raise, unless they want to be well into their thirties before they can afford to get on the property ladder. 

Many prospective buyers will be comforted by the government’s 95% mortgage deposit scheme, which has been in place since the Spring of 2021. 

 

PROS of 5% deposit mortgages 

 

1/ You won’t need to raise as much of a deposit, and will likely be able to buy sooner 

During 2021, it is reported that house prices rose at their fastest rate in fifteen years, with the average property price soaring by £20,000 from 2020 to 2021. The average price of a home is now a whopping £272,992, a record high. 

As prices continue on their upward trajectory, the feasibility of home ownership edges ever further away from prospective first-time-buyers. Unfortunately, it is now harder than ever for young people to imagine themselves being well positioned to purchase a home. 

This is where the benefit of a 5% deposit comes in, as first-time-buyers are, as a result, better able to buy a home, and sooner, too. 

For many, the prospect of having to spend one or two fewer years living with parents or in rented accommodation is a welcome one. Plus, the sooner you are able to get on the property ladder, the less you are at mercy to the upward trend in house prices. 

 

2/ Interest rates hit record lows in 2021

During 2021, interest rates plummeted to a record low of 0.1% amid a frenzy of home-buying. 

As 2022 creeps in, interest rates can surely only go up, many experts have noted, after having been so astronomically low. However, this increase could only be marginal in the coming year. It could therefore be wise to secure a mortgage sooner rather than later, before a potentially more severe hike in rates is ushered in further down the line.  

 

3/ You’re able to fix your payments for five years 

When taking out a 5% deposit mortgage – which means naturally higher interest rates – a fixed rate loan can provide some peace of mind regarding the stability of your monthly repayments. 

Luckily, under the 95% mortgage scheme, lenders are required to offer at least one five-year fixed rate product to prospective buyers. 

 

family moving into new home

 

CONS of 5% deposit mortgages

 

1/ Interest rates are inherently higher for 5% deposit mortgages

Due to the risk taken on by lenders when they loan you 95% of your properties value, you naturally pay a higher interest rate than you would if you put down a larger deposit. Over time, this means that your property essentially costs you more. 

 

2/ Re-mortgaging may be less realistic 

Unfortunately, when you put down a 5% deposit, it may be difficult to qualify for more competitive rates, should you seek to remortgage your home. 

As you make payments towards your mortgage, the loan-to-value (LTV, for short) on your property ought to decrease. If your home rises in value (woo!), this should happen at a quicker rate. However, starting with a 5% deposit naturally means it will take longer for your LTV to decrease. 

Additionally, if your property decreases in value and you find yourself in negative equity, you may well not be able to remortgage at all!

 

3/ You take on a greater risk of negative equity 

Your risk of negative equity is naturally higher when you take on a mortgage with only a 5% deposit under your belt. 

Negative equity defines the scenario in which your home is worth less than the mortgage secured on it, a phenomenon which can occur if house prices fall, which, let’s be honest, is always a very real possibility. 

It’s important to remember, however, that negative equity is only a risk factor if you’re planning to sell or remortgage your home. It’s important to bear in mind that as time goes on and you pay towards your mortgage, your stake in your home increases.


To conclude

There are, without a doubt, both upsides and downsides to securing a 5% deposit mortgage in the coming year. If you are considering getting on the property ladder by way of this scheme, it’s advisable to proceed with caution. It is undeniably, however, an excellent opportunity for first-time-buyers to purchase their first home, which often feels terribly out of reach for many. 

Ultimately, the most important thing is to ensure that you are aware of the risks that you naturally undertake with a 95% mortgage. Be aware that repayment plans which seem feasible and manageable right now may well become a great source of stress in the future, should your circumstances change. 

 

Need a helping hand to step onto the property ladder? The B-Advised team can help. Contact us today.