How the new “Deposit Unlock” mortgage scheme could help you get on and up the housing ladder

man lifts his partner up in excitement after moving home

With UK house prices continuing to rise, it is looking tougher and tougher for people to get on or up the housing ladder. Figures from the Office for National Statistics show that average UK house price was £264,000 in August 2021, a 10.6% increase when compared to August 2020.

If you’re looking to get a mortgage at the lowest interest rates, you may need upwards of a 10%, 15%, or even 20% deposit. 20% of the UK average house price is more than £50,000, a figure that many people may struggle to reach without years of savings behind them.

However, a new “Deposit Unlock” mortgage scheme may be there to help you if you’re looking to take the next step in home ownership. But what is it, and how can it help you or your family find a way on (or up) the housing ladder? Read on to find out.

The Deposit Unlock mortgage scheme allows for a 5% deposit

Deposit Unlock is a mortgage indemnity scheme that supports 95% loan-to-value (LTV) lending on new-build properties. This scheme is open to both first-time buyers looking to get onto the housing ladder, and second-time buyers looking to move up it.

The intention of the scheme is to make the new-build housing market more widely available, especially for those who may not have the funds for a larger deposit. Lowering the deposit requirement to 5% allows more borrowers to access a high LTV mortgage.

The Deposit Unlock scheme will be available across the country and is currently available on new-build properties between the value of £25,000 and £750,000.

The Deposit Unlock scheme may help you for several reasons

The current Help to Buy equity loan scheme helps first time buyers who may not have sufficient funds for a deposit get onto the property ladder. The government will loan up to 20% of the cost of a new-build home, or up to 40% in London, in return for an equity share of the new property.

The Deposit Unlock scheme offers a long-term alternative to the Help to Buy equity loan scheme, which is ending in March 2023. Crucially, it is available to more than just first-time buyers, helping those who may already own a home achieve the next step.

The joint initiative from the Home Builders Federation and the insurer Gallacher Re aims to encourage more lenders to offer low deposit mortgages on new-build homes.

When lending on homes they perceive as riskier – such as a new-build – banks and building societies sometimes take out insurance, known as indemnity. They can claim on this insurance if a home is repossessed, and they cannot sell it for an amount equal to the outstanding mortgage.

Under Deposit Unlock, the housebuilder will pay the costs of the indemnity insurance rather than the lender. This makes it a less risky proposition for the lender and should mean more mortgages are available to people wanting to buy a new-build home.

The scheme may make the dream of moving into a new-build home a reality for many people who thought it may not have been possible. However, there are some potential downsides to consider.

As with any mortgage, you need to weigh up the benefits and drawbacks

There are a few things to consider before diving headfirst into your new mortgage deal, though.

For one, the scheme has not yet been widely backed. So far, Nationwide are the only high street name to have openly supported the Deposit Unlock scheme although it is anticipated that more lenders will join the scheme in future.

Even if the scheme does gain more traction and does become more widely backed by mortgage providers, the nature of a small deposit means that you’ll likely pay higher interest rates.

This is because a lower deposit represents a greater risk to the lender as there is a greater chance of you falling into negative equity if property prices fell.

Lastly, you should be aware that there is often a “new-build premium” charge on new-build homes, which means that your home may cost more than an older property in the same area.

A financial adviser can help you make the right decisions

If you’re unsure about which mortgage scheme is right for you, or what size deposit you should have, contact a professional. As mortgage advice specialists, we can help to identify the best deal for you and your specific financial situation.

We are there to help you find the best way to buy your dream home. If you’d like to find out more about our services and how our advice can help you, get in touch by emailing enquire@london-money.co.uk or calling us on 0207 808 4120.