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Details of new 5% deposit mortgage scheme to be outlined in Budget

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Vicky Shaw, PA Personal Finance Correspondent
·4 min read
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Ultra-low deposit mortgages are set to make a comeback with a new 5% deposit home loan guarantee scheme.

Details about the new scheme are expected to be set out in Chancellor Rishi Sunak’s Budget on Wednesday.

The scheme will be available to current homeowners as well as first-time buyers looking to buy a house for up to £600,000.

The initiative will be available to lenders from April and is designed to increase the appetite of mortgage lenders to offer high loan-to-value lending to creditworthy customers across the UK.

Under the scheme the Government will offer to take on some of the risk of low deposit loans, meaning lenders would have some protection from potential losses.

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Low deposit loans are often seen as more of a risk because borrowers could end up in negative equity if house prices fall – meaning they owe more than their property is worth.

Lenders will be able to purchase a Government guarantee that compensates them for a portion of their losses in the event of foreclosure.

All lenders under the scheme will offer mortgages fixed for at least five years as part of their range of products, providing options for consumers with smaller deposits who want the security and predictability of a mortgage with a fixed rate over a longer term.

The new initiative follows in the footsteps of the UK-wide Help to Buy mortgage guarantee scheme, which was launched in 2013 and helped to reinvigorate the market after the 2008 financial crisis.

That scheme, which also offered 5% deposit mortgages, is no longer running.

It helped more than 100,000 households across the UK to buy a home, but it also drew accusations of pumping up property prices.

Many low deposit mortgages vanished from the market last year amid concerns about the wider economy.

However, more recently, lenders have been bringing back low deposit deals, clustered around the 10% deposit level.

For example, Yorkshire Building Society launched two new 10% mortgages on Wednesday exclusively for first-time buyers.

In recent months, house prices have jumped to record highs, fuelled by buyers wanting to move to make lifestyle changes, as well as a temporary stamp duty holiday.

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The stamp duty holiday is due to end on March 31, but it could be extended by another three months in the Budget, according to recent reports.

Rightmove estimates that 100,000 buyers who agreed a purchase last year are set to lose out if the deadline remains at March 31.

In total, it estimates an additional 300,000 property transactions in England could get through if the deadline is extended to June, saving buyers £1.75 billion in total.

Rightmove’s property expert Tim Bannister said: “We estimate that around 100,000 sales will miss the current March deadline, and so if the holiday is extended to the end of June it would give these the chance to complete in time, plus a number of other sales could now make it through that were only agreed at the start of this year.”

Kate Eales, head of regional residential agency at Strutt & Parker, said a possible extension “is likely to motivate potential buyers who thought about entering the market but might have been put off by lockdown restrictions and felt they had already missed the boat with this holiday altogether”.

She added: “An extension, combined with the recent Government road map to normality, is likely to work together to encourage more to come to the market and take advantage of the holiday.”

Prime Minister Boris Johnson said previously: “I want generation rent to become generation buy and these 95% mortgage guarantees help to deliver this promise.

“Young people shouldn’t feel excluded from the chance of owning their own home and now it will be easier than ever to get on to the property ladder.”

Mr Sunak said previously: “By giving lenders the option of a Government guarantee on 95% mortgages, many more products will become available, helping people to achieve their dream and get on the housing ladder.”