Budding home buyers and movers could soon buy a new-build home with a deposit of just 5 per cent – without the need for government help.
As the popular Help to Buy scheme draws closer to its end in 2023, a new initiative called Deposit Unlock is launching with the aim of helping buyers who struggle to get big mortgages on new-builds.
Nationwide Building Society, one of the Britain’s largest lenders, has just signed up to the scheme and will start to offer the loans soon.
On the ladder: The new Deposit Unlock scheme could help young home buyers get a mortgage on a new-build home with a deposit of 5% after Help to Buy ends in 2023
Lenders often set the minimum deposit for new builds at 15 or even 25 per cent, putting them out of reach for many first-time buyers.
This is because they can lose their value quickly after they are purchased.
The Help to Buy scheme got around this by offering first-time buyers a loan from the Government, making up 20 per cent of the purchase price – but it will close in 18 months’ time.
Deposit Unlock was started by the Home Builders Federation, the body which represents housing developers, as well as the reinsurance firm Gallagher Re.
It aims to help first-time buyers get on the ladder and second-steppers move up it.
The downside, though, is that Deposit Unlock loans are only available with a small number of housebuilders and mortgage lenders right now.
The scheme was first heard of back in June, when Newcastle Building Society started offering Deposit Unlock mortgages.
However, this was a pilot and was limited to just four plots in the North East, with a maximum property value of £330,000.
The first major mortgage lender to commit to Deposit Unlock mortgages is Nationwide
With Nationwide, the scheme is available through mortgage brokers on standard new build loans of between £25,000 and £750,000.
The nature of the scheme means it will be restricted to homes built by builders who have also signed up to Deposit Unlock – and Nationwide will announce these when it launches in the coming weeks.
We explain how the scheme works and who might be able to use it.
Why can’t I borrow as much on a new build?
Expert view: ‘Fantastic news for buyers’
Nicholas Mendes, mortgage broker at John Charcol
‘The new Nationwide scheme is an encouraging sign, as we continue to see lenders re-enter the market for 5 per cent deposit mortgages.
‘This is fantastic news for buyers as more options become available to help secure a property.
‘It allows them to purchase with a 5 per cent deposit, that isn’t through the Government-backed mortgage or Help to Buy scheme, on new-build properties only.
‘This means that you can be a home mover or a first-time buyer to take advantage.
‘Eligibility is based on Nationwide’s standard affordability criteria and not limited by the Government affordability stress tests, which factor in the servicing of the HTB loan after the first five years.
‘There are a few limitations though. Mainly, this scheme is not suitable self-employed applicants or individuals who would own another property on completion, for example a buy-to-let.’
Lenders are often uneasy about giving mortgages to those buying new-build homes. This is because the properties will usually lose some of their value in the first few years.
While a home’s first buyer is often willing to pay a premium to get a brand-new property, the second buyer will not have that same benefit and therefore it will often not be worth as much.
It can be hard to sell a new-build home for this reason, and this is something lenders worry about – because if a buyer does not pay their mortgage and the house is repossessed, selling the home will ultimately be down to them.
This means that those buying new-build homes often need to save up larger deposits than those buying older properties.
Those buying new-build flats may also be asked to pay more than new-build houses, as mortgage lenders can find them harder to value.
How does Deposit Unlock overcome this?
When giving out mortgages on homes they perceive as more risky, lenders sometimes take out insurance, known as indemnity.
This means they can recoup some of the costs if a home is repossessed, and they cannot sell it for an amount equal to the outstanding mortgage – but taking out this insurance costs them money.
Under Deposit Unlock, the housebuilders will pay to insure the mortgages, instead of the lenders – using a portion of the money they get from selling the homes to do so.
The theory is that this will make lenders more comfortable mortgaging new-builds.
What homes are eligible for Deposit Unlock?
One of the main restrictions buyers will come across is that they can only buy a home from a builder who is participating in the Deposit Unlock scheme.
The HBF says that 17 of its member housebuilders are part of the scheme, and that these companies account for 60 per cent of all homes built in the UK – so it sounds as if some big household names will be involved.
Barratt Developments, Bellway, Keepmoat and Vistry all sold homes as part of the Newcastle Building Society pilot.
However, we don’t yet know whether builders who have signed up to the full scheme will offer Deposit Unlock across all of their sites, or just a small number.
Help to Buy previously offered a route to home ownership, but this will be discontinued
The fact that only two lenders are signed up right now will also restrict buyers’ ability to use the scheme – as well as meaning they might not always get the best rate on the market.
However, the HBF said the scheme would ‘expand over the following months’.
It told This is Money that it would confirm all of the builders soon and that it expects other lenders to come on board over time.
What are the interest rates and other terms?
Each lender will have its own interest rates and affordability criteria for Deposit Unlock loans, so terms and conditions will vary.
Nationwide will offer the loans on properties between £25,000 and £750,000, with rates that mirror those on its regular mortgages.
It said: ‘Borrowers using Deposit Unlock will have access to [our] range of 5 per cent deposit mortgages, currently starting from 2.89 per cent, which they can use to buy a house or flat.’
The lowest rate on a 5 per cent deposit mortgage in the market as a whole is currently 2.69 per cent, so this is relatively competitive – though buyers should watch out for any arrangement fees.
In addition, the Deposit Unlock scheme is only available through mortgage brokers, so buyers should check whether their broker charges any fees – although many do not.
How is it different to Help to Buy?
Similar to Help to Buy, Deposit Unlock allows buyers to purchase a new-build home with a 5 per cent deposit.
But unlike Help to Buy, where 20 per cent of the purchase price is borrowed from the Government and the rest from a mortgage lender, Deposit Unlock sees buyers borrow the whole balance from their lender.
The main financial difference for buyers is that, while the Help to Buy loan is interest-free for the first five years, interest on a Deposit Unlock mortgage will be charged on the whole amount from the get-go.
Working in Deposit Unlock’s favour is the fact that it is open to people who are not first-time buyers, unlike Help to Buy.
The Help to Buy scheme will also end in 2023, and the people behind Deposit Unlock hope that it could replace the initiative, at least for some borrowers.
Neil Jefferson, managing director at the Home Builders Federation, said: ‘With the [Help to Buy] scheme winding down from the middle of next year, Deposit Unlock will help households onto the housing ladder and give developers confidence to invest in new land and labour to build on the massive housing supply increases of recent years.’
What about the Government’s mortgage guarantee scheme?
Since April this year, some mortgage lenders have been offering mortgages with 5 per cent deposits under the Government’s mortgage guarantee scheme, which will run until the end of 2022.
That scheme is only allowed to be used on pre-owned homes, not new builds – making it different to Deposit Unlock.
However, lenders signed up to the mortgage guarantee scheme face a conflict when it comes to signing up to Deposit Unlock.
Under the mortgage guarantee scheme, lenders need to pay the Government to guarantee their 5 per cent mortgage loans – even if they are already covered elsewhere.
So if they also joined Deposit Unlock, they would need to pay the Government to insure a loan that the builders had already insured on their behalf.
If major lenders who are already involved in the Government scheme – including NatWest, Lloyds, Barclays, HSBC and Santander – decide not to provide Deposit Unlock loans, this could limit how much the scheme grows.