Deposit Unlock is here!
The new scheme was launched in response to the ending of Help to Buy in England and it aims to support more buyers get onto or move up the housing ladder by making homeownership more affordable.
The scheme has been created through the Home Builders Federation
In short, it means that home buyers can buy a home with just a 5% mortgage. This is a much smaller deposit than the level required for most mortgages (which usually ranges from 15% – 20%).
The 5% deposit mortgage scheme was developed by the Home Builders Federation in partnership with major homebuilders and reinsurance broker, Gallagher Re.
How does deposit unlock work?
The Detail
For the Deposit Unlock scheme to work, the following steps happen:
Once you decide to move forward and purchase a qualifying home, the housebuilder makes a payment to an insurance company for a specific insurance product.
This payment provides insurance cover, which will pay out to the lender under certain events. This means that the lender is getting extra protection for any mortgages they are providing under the deposit unlock scheme.
Because the lender is getting additional protection, they are less worried about the home dropping in value and are happy to accept a smaller deposit from customers. This is why Deposit Unlock schemes allow a smaller deposit of 5% instead of 15%.
Key Benefits of Deposit Unlock
Lower Cash Upfront – 5% Deposit
With this scheme it is much easier for first time buyers to buy their first home. Mortgages can be obtained on deposit unlock with a 5% deposit, which is much easier to save up for than a 15% deposit.
Better Upside than Help To Buy Equity Loan
Although the help to buy equity loan did give buyers an equity loan of up to 20% outside of London (and 40% inside London) it did mean that when house prices increased, homeowners were only entitled to a share of the increase. If you had a home with a help to buy equity loan and sold the property at a higher price, you typically had to repay a larger amount of equity back to the government.
With the Deposit Unlock scheme you won’t have to give away equity to the government or a housing scheme. Instead you pay off all of your home over the course of the mortgage and get to keep 100% at the end.
New Build Homes More Affordable
It’s a fact that some people really do prefer new build homes compared to older homes. But new builds are normally more expensive, which makes them less affordable for first time buyers.
With Deposit Unlock some buyers are now able to afford more expensive homes as they only have to provide a 5% deposit.
Drawbacks of Deposit Unlock
Only For New Builds
Unfortunately the Deposit Unlock scheme is only available on new build homes.
But this does make sense – after all – the developer is paying into an insurance scheme when you buy a home.
Limits To The House Price
Deposit Unlock has a maximum limit. At the time of writing the maximum mortgage a buyer can get is up to £750,000 for a home.
Limited Lenders
Currently there is only a proportion of lenders that are willing to provide mortgages on deposit unlock. But it is hoped that this list will grow bigger over time as the scheme becomes more accepted with lenders.
Only For Specific Builders
Because the Deposit Unlock scheme requires a home builder to be a member, only certain house builders can offer these types of homes.
Deposit Unlock Mortgages
One of the most well known lenders who do offer mortgage products under deposit unlock is Nationwide.
The lender is offering deposit unlock mortgages of a loan to value ratio up to 95% of the property price.
Currently they are also offering mortgage terms of up to 40 years, slightly longer than some repayment mortgages. A longer mortgage can be helpful for affordability purposes, but it does mean that you would be paying more interest over the life of a mortgage. It’s important to get professional advice from a mortgage advisor.
Government schemes can change over time. Information can also become out of date, so it’s important to check the latest information with your chosen housebuilder and mortgage provider.