What Is Deposit Unlock

Concept of finance with cash in wallet

Over the last year, more than 852,000 people decided to buy a home for the first time in the UK property market. Across the country, just 63% of people buy homes. That number is relatively low compared to other countries and for good reason. Property prices in the UK, particularly in major cities and desirable areas, can be prohibitively expensive. This makes it challenging for many individuals and families to afford a home, especially without significant savings or access to mortgage financing. Add that to the fact that banks and lenders in the UK typically require a substantial deposit to secure a mortgage, and it’s easy to see the problem. Saving up for a significant deposit can be a significant barrier to homeownership for many people, and high property prices combined with relatively low wages in some areas of the UK make it challenging for some people to afford mortgage repayments. Because of these challenges, the UK has come up with several different ways to help first-time buyers, and one of those is Deposit Unlock. What is the Deposit Unlock scheme, and how can it help someone get into their first house? This quick guide can help you understand everything you need to know about Deposit Unlock.

Why The Deposit Unlock Scheme Exists

When it comes to purchasing a property in the UK, one of the significant hurdles for prospective buyers is saving for a deposit. In the traditional mortgage market, lenders typically require a deposit. In the UK, the typical minimum deposit for a mortgage required by lenders is around 5% to 20% of the property’s purchase price. The exact percentage depends on various factors, including the lender’s criteria, the buyer’s financial situation, and the type of mortgage product. For buyers who are struggling to save a large deposit, government-backed Help to Buy schemes like Deposit Unlock can provide assistance. These schemes aim to make homeownership more accessible by offering equity loans or shared ownership options with lower deposit requirements, like a 5% deposit.

What Is The Deposit Unlock Scheme?

This recently introduced 5% deposit scheme allows first-time buyers and individuals looking to move homes to purchase a new build property with 5% deposit mortgages. The Home Builders Federation, in collaboration with Gallagher Re, a reinsurance firm, developed this scheme. It aims to address the challenge of obtaining high loan-to-value new home mortgages, as many lenders are cautious in offering such financing options.

With the closure of the Help to Buy Equity Loan scheme for new applicants in October 2022, this 5% deposit mortgage scheme is likely to fill the void and attract buyers seeking to purchase new build homes with a small deposit.

How Does This Deposit Scheme In The UK Work?

To participate in this 5% deposit scheme in the UK, buyers must choose a house builder that is part of the program. Additionally, they must secure new build mortgages from one of the participating lenders, which currently include Newcastle Building Society, Nationwide, and Accord Mortgages.

All homes that become part of this program are new builds. The reason for that is simple. Mortgage lenders tend to be reasonably strict when it comes to how much they will lend on a new build so that when the property devalues (which happens faster with new builds than it does with other kinds of properties), their money experiences less risk. As a result, most lenders are only willing to lend 75 – 85% of the value of the property, leaving potential buyers with a deposit of up to 25%

With Deposit Unlock, though, it’s possible to get a mortgage with a 5% deposit. Under this scheme, the housebuilders themselves pay for mortgage insurance. They allocate funds from the proceeds of selling the homes to provide this insurance, aiming to alleviate lenders’ concerns and make them more comfortable offering mortgages with higher loan-to-value ratios (LTV) for new builds.

It’s important to note that this 5% deposit scheme is exclusively applicable to new build homes. Additionally, the maximum loan amount you can obtain through this scheme currently stands at £750,000, although this may vary depending on the lender and individual circumstances.

Are There Benefits To This Scheme?

The biggest benefit of this 5% deposit mortgage scheme is the fact that buyers can get a 95% mortgage on a brand-new property. That’s a huge help for many people because the average mortgage deposit in the UK holds many people back. The other benefit is that you get mortgages for new builds with this scheme, and that is a benefit in and of itself. New build homes are designed with modern lifestyles in mind. They often incorporate contemporary architectural styles, open floor plans, and efficient use of space. New builds also tend to come equipped with some of the best new features, like smart home technology and sustainable building materials. New build homes are also constructed with energy efficiency in mind. They often feature high-quality insulation, double-glazed windows, and modern heating systems. These energy-efficient features can help reduce utility bills and minimise environmental impact by lowering energy consumption. That makes a new build mortgage like this one completely worth it.

Moreover, though, buying a new build home means moving into a property with everything brand new. This generally translates to lower maintenance requirements in the initial years of homeownership. New builds come with warranties and guarantees for structural elements and appliances, providing peace of mind and potential cost savings.

The Drawbacks Of Deposit Unlock

While there are many benefits to this first-time buyer 5% deposit scheme, there are a few drawbacks as well. First, this will not work well for all applicants. You need to be a first-time buyer to take advantage of this deal. What’s more, though, is that you likely need to have regular employment to apply for these loans. Some of the lenders involved are willing to consider self-employed applicants, but not all of them will do so. If you are self-employed and you want to be one of these 5% deposit first-time buyers, you will need to research the program and lenders involved a bit more to decide whether you will be able to take advantage of the scheme.

Some feel this new-build scheme is far too limiting, too. Remember that not every property qualifies for this. You can only buy homes from builders who are willing to participate. While there are more than 35 different builders who are part of the new build 5% deposit scheme, that’s certainly not all of those who work in the UK, and it’s possible that some of the builders who are participating will only offer Deposit Unlock in select sites. If you cannot find 5% deposit homes that meet your criteria within this scheme, you will not be able to take advantage of everything that it has to offer, and that can be incredibly frustrating for some potential buyers.

Not every mortgage lender is willing to participate, either. One of the problems is that only three mortgage lenders have signed up to participate, so buyers may find they cannot access some of the better rates on the market from these three lenders alone with these 5% deposit mortgages in the UK.

If you’re not sure Deposit Unlock is right for you, it’s important to note that there are other ways to get a mortgage with a 5% deposit. Often through other schemes, you’ll find wider property choices with lots of different lenders willing to make the loan, so make certain that you’re choosing a house at a price that is truly right for you.

Are There Other Programs That Can Help?

Deposit Unlock is not the only program that can help put you in a house for the first time. You may also want to consider one of these programs.

First Homes Scheme

The First Homes scheme is a government initiative in the UK aimed at making homeownership more accessible for local first-time buyers and key workers. It was introduced to help individuals and families who were having a tough time finding a home due to high house prices. It was initially introduced in 2021, and there was only one space where these homes were available – Bolsover, East Midlands. Later that year, Cannock, Staffordshire, offered some homes. Throughout the year, several other spaces joined the scheme, including Newton Aycliffe, Durham, and Eastleigh Borough Council in Hampshire. More sites are joining on a regular basis, though.

Under the First Homes scheme, a certain percentage of newly built properties in development are designated as First Homes and made available at a discount compared to the market price. The scheme offers these homes to eligible buyers at a minimum of a 30% discount, although some areas may offer even higher discounts.

The scheme prioritises local first-time buyers, defined as those who have not previously owned property or have experienced a significant change in their housing circumstances. Key workers, such as healthcare professionals, teachers, and emergency service personnel, also have priority access to First Homes. Applicants are also typically required to have a local connection to the area where the First Homes are being offered. Local connection criteria may vary between local authorities, but it often includes factors such as living or working in the local area, having close family ties or immediate family living in the area, or having previously lived in the area. Additionally, many local authorities may set income and financial criteria to ensure that the scheme benefits those who genuinely require assistance with homeownership. The specific income thresholds and financial assessments can vary between authorities and may take into account factors such as household income, savings, and ability to secure a mortgage.

To ensure the long-term affordability of First Homes, certain covenants and resale restrictions are put in place when you buy with this scheme. This means that when the property is sold in the future, the discount must be passed on to the next eligible buyer. This helps maintain the availability of affordable homes for future generations.

If you’re interested in this scheme, you must do the research to see which builders are offering some of these developments, then contact the builder directly to ensure you meet the criteria. If you do, the builder helps you apply through the local authority. Many major high-street lenders and building societies offer a 95% loan-to-value mortgage for these homes, so you’ll need to contact a few different organisations to see who might work best for you. That means you need a lower deposit for houses on this program, which is a huge help for many.

There are many different benefits to this scheme. First, you own a freehold if it’s a house. If it’s a flat, you will own a leasehold. In both cases, though, it’s not shared ownership. Instead, it’s full ownership at a significant discount. Second, you won’t pay any Stamp Duty on these properties, which represents some additional savings for you. More than that, as with Deposit Unlock, all of the homes in the program are brand new, and that’s a huge advantage for many buyers.

As with any program, though, there are some drawbacks. First, there are very few homes that have become part of this scheme, so you may struggle to find an available property. Second, you need to be careful that you’re not overpaying. New builds tend to be far pricier than existing properties, and it may be worth it to find an existing home that meets your criteria just as well. One additional drawback is that you cannot use Help to Buy or any other scheme in conjunction with this one.

Shared Ownership

The Shared Ownership scheme is a different initiative in the UK designed to help individuals and families who cannot afford to buy a property outright on the open market. It offers an opportunity to purchase a share (usually between 25% to 75%) of a property from a housing association or registered provider while paying rent on the remaining share. Over time, buyers have the option to increase their ownership share through a process called “staircasing.”

Through this scheme, buyers can typically purchase a share of the property ranging from 25% to 75% of its market value. The specific percentage available will depend on the property and the housing association or registered provider. Buyers will then pay rent on the portion of the property they don’t own. This rental amount is typically set at a below-market rate and is payable to the housing association or registered provider. The innovative part of this option, though, is that buyers have the opportunity to increase their share of ownership over time through a process called staircasing. This involves buying additional shares of the property, which leads to a reduction in the rent paid on the remaining share. Buyers can eventually aim to own the property outright if they choose to purchase 100% of the shares.

There are certain eligibility criteria for the Shared Ownership scheme. Generally, applicants should be first-time buyers or former homeowners who cannot afford to purchase a suitable property on the open market. There may also be specific income limits and requirements related to local connections in some cases. Additionally, buyers are responsible for paying service charges, which cover the costs of maintaining and managing the property and any shared facilities. These charges are in addition to the mortgage payments and rent.

It’s important to note that Shared Ownership properties are typically leasehold, meaning the buyer has a lease agreement with the housing association or registered provider. A lease is a contract between both parties that helps them learn more about their rights as well as their responsibilities. Also, as buyers increase their share of ownership through staircasing, the value of the additional shares is based on the property’s current market value. This means that if the property’s value has increased since the initial purchase, buyers may need to pay more for each additional share.

The primary benefit of this program is the fact that the Shared Ownership scheme provides an opportunity for individuals and families to buy part of a property, which helps them get on the property ladder. It offers more affordable homeownership options, especially in areas with high property prices. There are some real drawbacks, too, though. The selection of properties available through the Shared Ownership scheme may be limited compared to the open market. Buyers may have fewer options in terms of location, property type, and size. This can make it more challenging to find a property that meets specific preferences and needs. There may also be additional costs involved. Buyers who participate in the Shared Ownership scheme are required to pay rent on the portion of the property they don’t own. While the rent is typically set at a below-market rate, it is an additional ongoing expense on top of mortgage payments and other housing costs. Additionally, you must pay service charges to cover maintenance, management, and communal facilities. These charges can vary and need to be factored into the overall cost of homeownership. The other drawback is that Shared Ownership properties are usually leasehold, meaning buyers have a lease agreement with the housing association or registered provider. As leaseholders, buyers may have certain restrictions and obligations outlined in the lease, including seeking permission for certain modifications or alterations to the property.

If You’re Considering Deposit Unlock Or Another Property Scheme . . .

Considering whether or not one of these schemes is the best way to help you get on the property ladder? It may help to evaluate your financial readiness. Evaluate your financial situation to assess if you are financially ready to buy a house. It may help to first take stock of your savings, including any dedicated funds for a down payment. Consider the amount you have saved and if it meets the minimum requirement for a down payment with the scheme you’re considering. Keep in mind that even if you have the ability to make just a 5% down payment, a higher down payment can often lead to better mortgage terms and lower monthly payments.

Once you’ve done that, you’ll want to evaluate your income to determine if it is stable and sufficient to cover mortgage payments and other homeownership expenses. A lender in any of those schemes will do the same thing, so it’s best if you do it first. Consider your monthly take-home pay and compare it to estimated monthly mortgage payments, property taxes, insurance, and maintenance costs. Ensure that you can comfortably afford these expenses while still maintaining a healthy financial position.

Next, use online affordability calculators or consult with mortgage advisors to estimate how much you can afford to borrow. These calculators take into account factors such as your income, monthly debt obligations, interest rates, and the loan term. They can provide an approximate range of property prices that align with your financial capacity.

If you still think you’re ready to buy, your next best bet is to identify the scheme that best meets your needs, and then connect with the right people to take advantage of the opportunity.

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