It used to be the case that first-time buyers and even those who’d purchased before, needed substantial deposits of 10-25% of a property’s value, just to buy a home.
Times have changed. 5% deposits have made a comeback and buyers don’t have to settle for doer-uppers.
New build developers across the country are building brand new homes that can be purchased with 95% LTV mortgages and what’s more, some can be bought through affordable homes schemes like shared ownership, the first-homes programme, or Help to Buy.
Buying a property with a 5% deposit and 95% mortgage can help some buyers without the means or time to save a larger deposit, get onto the property ladder.
Providing a mortgage agreement for 95% of a property’s value is a risk for a lender because if you, as the borrower, were to default on your loan, they could stand to lose a lot of money.
That being said, a residential mortgage would be secured against your new-build property, so if you were to fall into arrears and all other routes for repayment are exhausted, your property could be repossessed and sold to settle the loss.
Because of that risk, you might find that interest rates can be higher for 5% mortgage agreements but crucially, there are lots of other factors that can also affect the amount of interest you’re charged, like your credit history and stability of income.
There are a few different routes that could each be available to you, depending on your circumstances. Compare the new-build schemes and incentives below to better understand what might be best for you.
It might be the case that none of the below options are relevant to your needs but don’t worry, that doesn’t exclude you from homeownership. That’s the good thing about having so many mortgage lenders in the UK - there are lots of variations of criteria.
It might work out better for you to have a larger deposit or access a different scheme or mortgage product, plus it’s always worth seeing what else is out there.
Talk to a reviewed mortgage broker about your current personal and financial circumstances so that they can work to find you the most suitable and affordable route.
If you opt for this scheme, you’d need a 5% deposit, with the government providing an equity loan of up to 20% of the value of the property you’re buying. That gives you a 25% deposit so you’d need to find a lender willing to loan you 75% of your chosen property’s value.
The 20% equity loan is interest-free for 5 years and then after that period, the loan is charged at an interest rate of 1.75%, and then following the sixth year, the interest on the equity loan will increase by the Consumer Price Index (CPI) plus 2% (1% if you took the equity loan before December 2019).
The regional price caps affect the amount of money needed by a borrower to raise a 5% deposit. The table below shows the difference in deposit sizes across the regions based on the maximum property purchase price possible with Help to Buy: Equity Loan.
You (the borrower) pay 5% of the market value of the property you want to buy while your lender loans you the other 95% to fund the purchase.
To reduce the risk of loss to the lender, the government provides lenders with the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.
In other words, the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80% of the purchase value of the guaranteed property and will be valid for up to 7 years after the mortgage is completed.
Affordability requirements will need to be met and the interest rate an individual is charged will vary depending on which lender you choose to go with.
Several high street lenders participate in the scheme but the criteria you need to meet as the borrower differs, so never just apply for a 5% deposit mortgage without first knowing whether you’re likely to be accepted.
Selected housing developers ringfence 25% of their sites as affordable housing for those who qualify for the scheme. Applicant(s) must earn an annual salary below £80,000 a year (or £90,000 in London) and want to buy a new-build house or flat in the area they grew up, work, or currently live in.
The minimum discount applied is 30% but local authorities may decide to increase the discount to as much as 50% if the buyer’s circumstances call for it.
If you have affordability issues and you’re concerned about how this could stop you from getting a mortgage, ask for help. A mortgage broker can let you know your next steps quickly and whatever you tell them is confidential.
Usually though not always, the more severe or more recent the bad credit, the fewer lenders you’ll have to choose from and the higher the interest rate you’ll be charged. If you’ve repaid any debts owed in full and they’re now settled, that can help to build a case that you’re the kind of person that repays their financial obligations.
Bad credit isn’t just a term used for debt issues, any late payments or a low credit score can also impact a person’s creditworthiness.
It’s helpful to keep up to date with your credit report with each of the main credit reference agencies (CRAs) that banks and lenders typically use.
You can check your credit report on sites like CheckMyFile to see what financial and historical information lenders can see about you when they’re making their decision to accept you as a borrower or not.
Knowing what’s on your report can help you to take steps to improve it.
For example, if your annual salary is £20,000, a lender could multiply this by 4.49 and determine that you can borrow £89,800. While a 5% deposit would only cost you £4,490, you may struggle to find a property with your maximum loan amount.
For example, if your partner also earned £20,000 a year, your combined annual income of £40,000 could be multiplied by 4.49 to determine your maximum mortgage is £179,600.
This can make some lenders nervous about your ability to repay your mortgage on time and in full, especially if you have big dips, however, not all lenders take the same approach and a handful of lenders specifically provide mortgages for contractors, freelancers and self-employed workers.
You might be expected to pay a slightly higher deposit but potentially not, as your circumstances as a whole will affect a lender’s decision.
If you have a good credit history, steady income and 2-3 years’ tax returns, you could be eligible for a 5% deposit mortgage. If you’ve traded for less than 2-3 years, don’t worry - some lenders accept less.
Having a larger deposit can increase your choice of lenders and their interest rates, helping you to achieve a cheaper deal in some instances.
A select few housing developers are offering a range of incentives, some of which could see a 10% deposit transformed into a 15% one. This allows borrowers to apply for an 85% loan-to-value and therefore, borrow less and pay less in interest throughout their agreement.
Speak to a new-build mortgage advisor about the incentives that each UK housing developer can offer as there may be eligibility criteria that you need to meet before being able to apply.
Having a 15% chunk of equity upfront can also mitigate the chance of falling into negative equity too.
To work out your equity, take the amount the property is currently worth, then subtract the outstanding loan on your mortgage - which will be the original price you paid, minus your deposit and repayments.
Equity = current value minus outstanding loan amount. If this amount is below zero, your property is currently in negative equity.
Say you buy a £200,000 home with a £20,000 deposit - meaning the loan when you buy is £180,000.
After five years, you may have seen the property value increase by 25% to £250,000.
You've also repaid £25,000 in that time, meaning your outstanding loan is now £155,000 - so your equity would be £95,000. But if prices decreased by 25%, your home would now be worth £150,000, even though you still owe the bank £155,000. In this situation, you would be in negative equity by £5,000.
That’s not a good position to be in financially because if you have to sell your home, whether by choice or because you can no longer afford it, you’d still owe money to the lender after selling it.
Prepare the documents that you’ll need for a mortgage application because your mortgage broker will need these too. They’ll use the information you pass onto them to find lenders that can offer you an agreement that’s a good fit for your circumstances.
These will include:
New Builds typically come with 10-year warranties which are split into two periods. The defects insurance period covers the first two years and the structural insurance period covers years three to 10.
If you have 5% of your chosen property’s value you’ll need to borrow the other 95% with a mortgage as well as keep money aside for solicitor’s fees, mortgage arrangement fees and any other charges that you may incur too.
Not all developers work within the same areas, so for an accurate reflection of the developers that may be accessible to you where you’re from, or hoping to buy in, ask a mortgage broker. They’ll have relationships and connections with housing developers including those that offer shared ownership schemes.
Times have changed. 5% deposits have made a comeback and buyers don’t have to settle for doer-uppers.
New build developers across the country are building brand new homes that can be purchased with 95% LTV mortgages and what’s more, some can be bought through affordable homes schemes like shared ownership, the first-homes programme, or Help to Buy.
What is a 95% LTV mortgage?
When you apply for a mortgage with a 5% deposit, the amount you need to borrow as a percentage is 95%. This is referred to as the loan-to-value rate or LTV.Buying a property with a 5% deposit and 95% mortgage can help some buyers without the means or time to save a larger deposit, get onto the property ladder.
Providing a mortgage agreement for 95% of a property’s value is a risk for a lender because if you, as the borrower, were to default on your loan, they could stand to lose a lot of money.
That being said, a residential mortgage would be secured against your new-build property, so if you were to fall into arrears and all other routes for repayment are exhausted, your property could be repossessed and sold to settle the loss.
Because of that risk, you might find that interest rates can be higher for 5% mortgage agreements but crucially, there are lots of other factors that can also affect the amount of interest you’re charged, like your credit history and stability of income.
Can a first-time buyer get a mortgage with a 5% deposit?
Yes! While the best interest rates are reserved for people with a larger deposit, it is still possible to get a mortgage as a first-time buyer with just a 5% deposit.
You’ll need to be able to prove that you have good affordability for the mortgage amount you’re asking for, so be prepared to show evidence of your income, as well as have your credit report reviewed by your chosen lender.
Getting a mortgage for 95% of a property could be possible as a variety of lenders are increasingly creating and reintroducing 5% deposit mortgage products.
Check your eligibility with a first-time buyer mortgage broker that knows what they’re talking about and find out how much deposit you might need for a mortgage in 2021/2022.
Can you get a 95% mortgage on a new build?
A 95% mortgage can be used to buy a new-build property and many developers promote this knowledge to help first-time buyers and those looking to buy a brand new home.There are a few different routes that could each be available to you, depending on your circumstances. Compare the new-build schemes and incentives below to better understand what might be best for you.
It might be the case that none of the below options are relevant to your needs but don’t worry, that doesn’t exclude you from homeownership. That’s the good thing about having so many mortgage lenders in the UK - there are lots of variations of criteria.
It might work out better for you to have a larger deposit or access a different scheme or mortgage product, plus it’s always worth seeing what else is out there.
Talk to a reviewed mortgage broker about your current personal and financial circumstances so that they can work to find you the most suitable and affordable route.
5% deposit schemes in the UK
Help to Buy: Equity Loan
An equity loan helps first-time buyers boost their deposit amount by 20% (40% in London) and that can help them meet the eligibility criteria of a wider range of lenders. The more choice of lenders, the more choice of rates, which can in turn result in a cheaper mortgage overall.If you opt for this scheme, you’d need a 5% deposit, with the government providing an equity loan of up to 20% of the value of the property you’re buying. That gives you a 25% deposit so you’d need to find a lender willing to loan you 75% of your chosen property’s value.
The 20% equity loan is interest-free for 5 years and then after that period, the loan is charged at an interest rate of 1.75%, and then following the sixth year, the interest on the equity loan will increase by the Consumer Price Index (CPI) plus 2% (1% if you took the equity loan before December 2019).
Need to know:
- Help to Buy is now only available to first-time buyers, due to changes in government legislation.
- There are regional price caps with Help to Buy that limit the maximum value of a property that can be purchased under the scheme.
Help to Buy: Equity Loan deposit example
House prices range dramatically across England which is why there is a maximum property purchase price’ limit for the home you buy through Help to Buy: Equity Loan, depending on which region it’s in.The regional price caps affect the amount of money needed by a borrower to raise a 5% deposit. The table below shows the difference in deposit sizes across the regions based on the maximum property purchase price possible with Help to Buy: Equity Loan.
UK regions | Maximum property purchase price if using Help to Buy: Equity Loan | Buyer’s deposit (5% of the market value of the new build you’re buying) | Help to Buy: Equity Loan (20% of the market value of the new build you’re buying) |
North East | £186,100 | £9,305 | £37,220 |
North West | £224,400 | £11,220 | £44,880 |
Yorkshire and the Humber | £228,100 | £11,405 | £45,620 |
East Midlands | £261,900 | £13,095 | £52,380 |
West Midlands | £255,600 | £12,780 | £51,120 |
East of England | £407,400 | £20,370 | £81,480 |
London | £600,000 | £30,000 | £120,000 |
South East | £437,600 | £21,880 | £87,520 |
South West | £349,000 | £17,450 | £69,800 |
Government-backed 95% mortgages
Government-backed 95% mortgages allow eligible applicants to buy homes worth up to £600,000 with just a 5% deposit, helping people to own larger and more valuable property earlier on in their life. A government-backed loan isn’t exclusively open to first-time buyers though; eligible home movers can apply too.You (the borrower) pay 5% of the market value of the property you want to buy while your lender loans you the other 95% to fund the purchase.
To reduce the risk of loss to the lender, the government provides lenders with the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.
In other words, the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80% of the purchase value of the guaranteed property and will be valid for up to 7 years after the mortgage is completed.
Affordability requirements will need to be met and the interest rate an individual is charged will vary depending on which lender you choose to go with.
Several high street lenders participate in the scheme but the criteria you need to meet as the borrower differs, so never just apply for a 5% deposit mortgage without first knowing whether you’re likely to be accepted.
Need to know:
The scheme has been open for new mortgage applications since April 2021 and closes in December 2022.
- Unlike the Help to Buy: Equity Loan scheme, which is restricted to first-time buyers purchasing a new build, a 95% government-backed mortgage can be used to buy any property under the value of £600,000.
- That leaves the option of renovating an older property open, which could attract investors looking to make a profit.
First homes programme
This isn’t a 5% deposit scheme but the first homes programme (FHP), could allow eligible buyers to purchase a new-build property at a 30% discount with a handful of local councils providing as much as a 50% discount.Selected housing developers ringfence 25% of their sites as affordable housing for those who qualify for the scheme. Applicant(s) must earn an annual salary below £80,000 a year (or £90,000 in London) and want to buy a new-build house or flat in the area they grew up, work, or currently live in.
The minimum discount applied is 30% but local authorities may decide to increase the discount to as much as 50% if the buyer’s circumstances call for it.
Need to know:
- Having a local connection to the area that you want to purchase your home in can help some buyers
- Some authorities may also choose to give preference to key workers, people who work in the area, and those caring for people in the local area.
First homes programme 5% deposit example
Market value of new build home | Price you pay after 30% discount applied | 5% deposit based on purchase price | 10% deposit based on purchase price |
£350,000 | £245,000 | £12,250 | £25,000 |
£340,000 | £238,000 | £11,900 | £23,800 |
£330,000 | £231,000 | £11,550 | £23,100 |
£320,000 | £224,000 | £11,200 | £22,400 |
£310,000 | £217,000 | £10,850 | £21,700 |
£300,000 | £210,000 | £10,500 | £21,000 |
£290,000 | £203,000 | £10,150 | £20,300 |
£280,000 | £196,000 | £9,800 | £19,600 |
£270,000 | £189,000 | £9,450 | £18,900 |
£260,000 | £182,000 | £9,100 | £18,200 |
£250,000 | £175,000 | £8,750 | £17,500 |
£240,000 | £168,000 | £8,400 | £16,800 |
£230,000 | £161,000 | £8,050 | £16,100 |
£220,000 | £154,000 | £7,700 | £15,400 |
£210,000 | £147,000 | £7,350 | £14,700 |
£200,000 | £140,000 | £7,000 | £14,000 |
Shared Ownership
Shared ownership (also known as ‘part-buy, part rent’) enables people to buy a share of a property between 10 - 75%, depending on the developer.
Tenants pay a subsidised rent on the remaining share they don’t own with the option to ‘staircase’, which means buy more shares later on. As more shares are purchased, rent goes down.
Most Shared Ownership schemes also charge a service charge too, though the cost of this can vary.
You’ll need a deposit, which is usually a minimum of 5% of the share you’re purchasing and then you’ll likely need a mortgage to fund the rest of the purchase.
As an example, if you wanted to buy a 50% share in a home valued at £200,000, you would need funds for £100,000. A 5% deposit would cost you £5,000, so you’d need a 95% mortgage of £95,000.
Need to know:
- If you opt for Shared Ownership 2021, you’ll buy a percentage share of the market value of the property and enter into a lease agreement with a landlord.
- Rent on a Shared Ownership home is usually set at around 3% of the unsold equity, however, this can vary depending on the developer.
- Further shares can be purchased later, and tenants may purchase increments of 1% during the first 15 years. Thereafter, tenants can staircase at a minimum of 5% a time.
How can I get a 5% deposit mortgage?
Your ability to get a mortgage with a low deposit of 5% will be dependant on lots of factors that affect your overall affordability such as:- Income
- Debt
- The value of the property you’re buying
- The type of property you’re buying
- Your job type
- Your credit history
If you have affordability issues and you’re concerned about how this could stop you from getting a mortgage, ask for help. A mortgage broker can let you know your next steps quickly and whatever you tell them is confidential.
Will bad credit stop me from getting a mortgage with a 5% deposit?
Bad credit isn’t necessarily the be-all and end-all for your mortgage application and lots of first-time buyers buy property despite having credit issues, including CCJs.Usually though not always, the more severe or more recent the bad credit, the fewer lenders you’ll have to choose from and the higher the interest rate you’ll be charged. If you’ve repaid any debts owed in full and they’re now settled, that can help to build a case that you’re the kind of person that repays their financial obligations.
Bad credit isn’t just a term used for debt issues, any late payments or a low credit score can also impact a person’s creditworthiness.
Can I get a 5% mortgage with a low credit score?
Usually, a lower credit score indicates that a person isn’t a trustworthy borrower, so by improving your credit score, you can help to improve your overall affordability for a mortgage and therefore, the number of lenders that might approve you could increase.It’s helpful to keep up to date with your credit report with each of the main credit reference agencies (CRAs) that banks and lenders typically use.
You can check your credit report on sites like CheckMyFile to see what financial and historical information lenders can see about you when they’re making their decision to accept you as a borrower or not.
Knowing what’s on your report can help you to take steps to improve it.
How does my income affect my ability to get a mortgage with a 5% deposit?
Some lenders may cap the maximum amount of loan they’re willing to lend you. Some lenders use income multiples of 4.49 and up, to calculate how much they can provide a borrower on a mortgage.For example, if your annual salary is £20,000, a lender could multiply this by 4.49 and determine that you can borrow £89,800. While a 5% deposit would only cost you £4,490, you may struggle to find a property with your maximum loan amount.
Getting a joint mortgage with a 5% deposit
Borrowing on a joint mortgage can help increase the amount you can borrow on a 95% mortgage as both applicants' incomes could be considered.For example, if your partner also earned £20,000 a year, your combined annual income of £40,000 could be multiplied by 4.49 to determine your maximum mortgage is £179,600.
Can I get a 5% deposit mortgage if I’m self-employed?
Being self-employed means earning your own income and sometimes, that creates irregularities in how much you earn throughout the year.This can make some lenders nervous about your ability to repay your mortgage on time and in full, especially if you have big dips, however, not all lenders take the same approach and a handful of lenders specifically provide mortgages for contractors, freelancers and self-employed workers.
You might be expected to pay a slightly higher deposit but potentially not, as your circumstances as a whole will affect a lender’s decision.
If you have a good credit history, steady income and 2-3 years’ tax returns, you could be eligible for a 5% deposit mortgage. If you’ve traded for less than 2-3 years, don’t worry - some lenders accept less.
How can I increase my deposit by 5%?
Saving another 5% on top of your savings can feel like a hurdle but some buyers could benefit from a boost.Having a larger deposit can increase your choice of lenders and their interest rates, helping you to achieve a cheaper deal in some instances.
A select few housing developers are offering a range of incentives, some of which could see a 10% deposit transformed into a 15% one. This allows borrowers to apply for an 85% loan-to-value and therefore, borrow less and pay less in interest throughout their agreement.
Speak to a new-build mortgage advisor about the incentives that each UK housing developer can offer as there may be eligibility criteria that you need to meet before being able to apply.
Having a 15% chunk of equity upfront can also mitigate the chance of falling into negative equity too.
What’s negative equity and why do I need to know about it?
When you first buy a property with a mortgage, your equity will be the deposit you put in - for example, if you buy with a 20% deposit, your equity will be 20% of the home's value.To work out your equity, take the amount the property is currently worth, then subtract the outstanding loan on your mortgage - which will be the original price you paid, minus your deposit and repayments.
Equity = current value minus outstanding loan amount. If this amount is below zero, your property is currently in negative equity.
Say you buy a £200,000 home with a £20,000 deposit - meaning the loan when you buy is £180,000.
After five years, you may have seen the property value increase by 25% to £250,000.
You've also repaid £25,000 in that time, meaning your outstanding loan is now £155,000 - so your equity would be £95,000. But if prices decreased by 25%, your home would now be worth £150,000, even though you still owe the bank £155,000. In this situation, you would be in negative equity by £5,000.
Should I try to save a bigger deposit so I decrease the risk of negative equity?
That might not be something to worry about now but if property prices were to suddenly fall and you had a lower deposit of say, 5 or 10%, you could end up owing more money on your mortgage than your home is worth.That’s not a good position to be in financially because if you have to sell your home, whether by choice or because you can no longer afford it, you’d still owe money to the lender after selling it.
New-build property value at the time of purchase | Deposit size | Deposit in GBP | Mortgage debt at the start of the mortgage | Loan-to-value (LTV) | Property value after 10% decrease in property prices | Equity after property price decrease |
£200,000 | 5% | £10,000 | £190,000 | 95% | £180,000 | -£10,000 |
£200,000 | 10% | £20,000 | £180,0000 | 90% | £180,000 | £0 |
£200,000 | 15% | £30,000 | £170,000 | 85% | £180,000 | £10,000 |
£200,000 | 20% | £40,000 | £160,000 | 80% | £180,000 | £20,000 |
£200,000 | 25% | £50,000 | £150,000 | 75% | £180,000 | £30,000 |
5% deposit mortgages: What to do next
If you’re curious about your chances of getting a mortgage with a 5% deposit, ask a broker to check for you. They can do this without affecting your credit score, which is a bonus, and even if now isn’t the best time, you’ll know how far away the goal is and what you need to do to work towards it.Prepare the documents that you’ll need for a mortgage application because your mortgage broker will need these too. They’ll use the information you pass onto them to find lenders that can offer you an agreement that’s a good fit for your circumstances.
These will include:
- Passport – must not be expired and must be the right name (not your maiden name if married).
- Driving License – must have your current address.
- Council tax statement - latest one available.
- Utility Bills – usually dated within 3 months.
- Bank statements – statements are required as opposed to transaction lists. These can be postal statements or online statements.
5% deposit FAQs
What counts as a new-build property?
A building that has recently been built or is in the process of being built. Usually designed and sold by housing developers.New Builds typically come with 10-year warranties which are split into two periods. The defects insurance period covers the first two years and the structural insurance period covers years three to 10.
How long does a 5% deposit mortgage last?
A standard mortgage term used to be 25 years but lenders have agreements that span between 5-40 years depending on the borrower’s circumstances. A longer mortgage term might mean lower mortgage repayments but you’ll pay more in interest overall, making the mortgage more expensive.Is 5% enough for a mortgage deposit?
Yes, with many mortgage lenders having 5% of a property’s value can help you to qualify for a mortgage. Bear in mind that low deposit agreements can sometimes come with higher rates of interest so it could be worth considering saving a larger amount in order to borrow less if this is something you’re able to do.Can I buy a property with a 5% deposit?
It may be possible but ultimately it’s your circumstances as a whole, including your age, credit history, income and deposit size, that will affect the outcome of your mortgage application.If you have 5% of your chosen property’s value you’ll need to borrow the other 95% with a mortgage as well as keep money aside for solicitor’s fees, mortgage arrangement fees and any other charges that you may incur too.
What developers build new-build homes with 5% mortgage deposits?
In the UK there are several widely-known lenders that create homes for people that can be bought with low deposits as little as 5%.Not all developers work within the same areas, so for an accurate reflection of the developers that may be accessible to you where you’re from, or hoping to buy in, ask a mortgage broker. They’ll have relationships and connections with housing developers including those that offer shared ownership schemes.
First Time Buyers Expert Article by
Giacomo Stevens
(Operations Director)
The Mortgage Hut