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5% mortgages for first time buyers

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Oct 16, 2022

Fact Checked By:
David Nicholson - Finance Editor

5% Mortgages for first-time buyers

Between 2020 and 2021, Statista reported that only 11.2% of homeowners in England fell between the ages of 25 to 34 years.

Perhaps, the leading cause for such a low rate of homeowners in this age range is the eligibility criteria for most mortgage lending institutions which seems like a slippery slope to climb for most first-time buyers.

To boost the housing market and reduce home ownership requirements, the British government promoted the 95 mortgage guarantee scheme to help first-time buyers climb the property ladder through attainable mortgage deals.

What is the 5% mortgage guarantee scheme all about? How does this scheme help first-time buyers?

Here is all you need to know about this government’s mortgage guarantee scheme and what it could mean for the UK housing market in the long term.

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How does the 5% mortgage guarantee scheme work?

In 2021, the government launched a guarantee scheme that promoted low-deposit mortgages amongst lenders. For a very long-time, lenders had complicated application procedures for house loans for prospective buyers with a low deposit figure of less than 9%.

A lengthy affordability and credit history assessment discouraged buyers from veering toward this route to be approved for such loans. The younger folk and low-income workers preferred to pay rent monthly than apply for a home loan. As expected, this had a negative impact to a certain extent on the real-estate sector.

The guarantee scheme was introduced to grow this sector, especially during the pandemic. Lenders that are a part of this scheme have a guarantee from the government that they would cover some of the losses incurred from these 5% deposit mortgages in the event the property is repossessed.

This scheme was introduced to effect long-lasting benefits on the real estate market, especially for first-time buyers.

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5% Mortgage plan benefits for first-time buyers

Unfortunately, not all first-time buyers manage to save up a sufficiently large deposit for their first property purchase. On the contrary, they might have a small deposit but have the financial capacity for monthly payments quoted on a higher repayment mortgage solution.

Such buyers can benefit from a 95 mortgage depending on the local house prices in their neighbourhood.

As a result, even potential buyers with a small deposit can get on the property ladder sooner by buying their first home. Since house prices fluctuate, buyers can lock in a fixed-rate deal on their 95 mortgages.

In some real-estate markets, securing a long-term fixed-rate deal could prevent your interest rate from rising. The rates remain fixed for that mortgage, and the monthly repayments will depend on the rate quoted on the mortgage calculator.


What is the easiest way to get the best mortgage deal?

Finding the perfect mortgage deal that fits your circumstances can be a mammoth task. Comparing all deals and ensuring that you are getting the best one is not easy, which is why many homeowners use a mortgage broker as their go-between when seeking the best deal from all lenders.

This option makes perfect sense: mortgage brokers work with lenders every day and are the most equipped to negotiate and find the best deal for the people they represent.

Even then, you can get a better deal by paying a higher deposit. Although the 5% deposit is a viable option, some lenders tend to view it as a risky option to them.

Therefore, a higher interest rate might be imposed on your mortgage, making the arrangement slightly less ideal. If possible, throw in an extra 1-4% to get a slightly better deal.

At the other extreme, fixing your credit score will reduce the risk factor and lower the interest rate on this mortgage deal.

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Eligibility criteria for the 95% mortgage LTV plan

To qualify for the 95% mortgage plan, the mortgage lender must assess your application per the eligibility criteria, especially if you use the government-backed mortgage scheme. Some of the most important criteria include the following:

  • The property in question must be the primary residence of the applicant. Properties bought to rent out or used as a second home do not qualify under this government mortgage scheme.
  • The property’s purchase price must not exceed £600,000
  • To qualify for the mortgage, you should have a deposit between 5-9%. For a property valued at £600,000, the deposit must range between £30,000-54,000.
  • Applicants must satisfy the affordability criteria: they should have a salary or joint income sufficient for the monthly mortgage repayments.

Although first-time buyers may benefit the most from this type of mortgage, other home buyers relocating or selling their old house are also welcome to apply, provided they meet the eligibility criteria.


Does this government guarantee have an impact on interest rates?

The government guarantee makes the 5% mortgage look a bit more convenient. Perhaps, you might be wondering what the catch is.

Does the mortgage have absurdly high-interest rates? Not at all! The mortgages are the same, just that the LTV is higher, as can be expected, which means the monthly repayments on your mortgage will be higher, depending on the repayment term.

The government’s involvement extends to providing approximately 14.5% as the guarantee if the buyer doesn’t hold up their end of the deal in the event of repossession. However, all rates are treated the same as other mortgages.


Impact of the 5% mortgage scheme on the residential property market

Quickly after the COVID-19 pandemic struck, house prices fell sharply, but through government schemes like this, the residential property market recovered and soared. The 5% deposit mortgage scheme positively affected this turn of events.

The residential property market recovered due to direct intervention from the government, which made houses a little more attainable even for first-time buyers. From these initiatives, property prices recorded a new peak since mortgage providers were at ease with providing low-deposit mortgages due to the guarantee provided by the government.


Can you get interest-only mortgage payments through this scheme?

Interest-only mortgages are a different beast. These loans allow buyers to pay off only the interest throughout the repayment term. At the end of the term, the buyer still has to pay off the rest of the property’s value.

This can be done by taking another mortgage, paying the outstanding amount as a lump sum or selling the property to pay it off.

This type of loan is hard to get as it requires a large deposit and does not rank under 5% deposit mortgages. Therefore, you can’t get interest-only mortgage payments through this scheme, although it could make a world of difference in reducing the monthly repayment amount.


What other options are available for first-time buyers?

Other options are available for first-time residential buyers, and some are also government initiatives. What are these alternatives? Here are just a few of them:

Help to Buy Equity Loan scheme

If you are more interested in buying a new-build home, the Help to Buy Equity loan scheme is the perfect option.

This scheme was specifically designed for buying residential property and is available solely to first-time residential buyers. Therefore, this mortgage plan is out of the question if you have owned any residential property in the UK or abroad.

Shared ownership

Some first-time residential buyers might not afford other mortgage plans, and this government-backed scheme is an efficient way to get a new-build home or existing residential property at a lower cost.

The model for shared ownership revolves around buying a certain share of the property and paying rent for the rest of the property. You can buy a larger share down the line, effectively reducing your rent.

Guarantor mortgages

Sometimes lenders may not approve your application due to a bad credit record or similar reasons. In that case, you can ask someone else with a clean record to sign as a guarantor. This can be a family member or someone close who will agree to be the guarantor.


Apply for the 5% mortgage guarantee scheme with Loan Corp today!

Loan Corp is prepared to help you apply for a 5% mortgage from industry-leading lenders with the best deals available.

We are invested in making sure that our clients get the homes they endeavour to buy through effective finance solutions. Even if you do not qualify for a 5% mortgage at this time, we will seek out other suitable options.

Don’t worry about securing a suitable mortgage – we do that for you! The best part is that our entire process is stress-free and completely transparent. Get in touch with Loan Corp representatives today to apply for a mortgage below:

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Frequently asked questions

Can first-time buyers get a 5% mortgage?

The 5% mortgage is open to first-time buyers.

Although they might not get a great deal, especially if their credit score is considered minor, they can have a house they call home. Through the help of a mortgage broker, first-time buyers can get a better deal than they would solo.

Is it worth getting a 5% mortgage?

A 5% mortgage might be the best deal for some home buyers that need to get on the property ladder as soon as possible. On the other hand, some home buyers might afford a larger monthly repayment but can’t afford a significant upfront deposit.

For such individuals, getting a 5% mortgage is well worth it.

Do First-Time Buyers pay a 5% deposit?

First-time buyers do have the option to put up a 5% deposit, but a higher amount can do wonders to the LTV of the mortgage.

All home buyers are encouraged to put up a higher deposit, as much as they can save up to get a great deal. To benefit from the government scheme, you can put up as much as 9%, giving you a 91% LTV mortgage.


Final thoughts

Using the services of a trusted mortgage broker will increase the chances of being approved for a 95 mortgage while getting you the best deal.

However, regardless of how you get a 95 ltv mortgage, remember that putting up a higher deposit whenever possible will have a positive impact on the outstanding amount that needs to be repaid.

As a first-time buyer, ensure you get a 95% loan-to-value mortgage that suits your specific circumstances and weigh the pros and cons of getting a fixed-rate mortgage before committing to anything.

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