- Nationwide becomes the first major lender to sign up for the initiative
- It gives home buyers a chance to get a mortgage on new construction with a 5% deposit
- The plan could fill the gap left by Help to Buy when it ends in 2023
- It is not yet clear how many home builders and lenders will sign up
- This could be ‘great news for buyers’, says a mortgage expert
Budding home buyers and movers may soon be able to buy a new home with a deposit of just 5 per cent – without government help.
As the popular Help to Buy scheme nears its end in 2023, a new initiative called Deposit Unlocked is rolling out aimed at helping buyers who struggle to get large mortgages on new-builds.
The Nationwide Building Society, one of the UK’s largest lenders, has just signed up for the scheme and will start lending soon.
On the ladder: The new Deposit Unlocked scheme can help young home buyers to get a mortgage on a newly-constructed home with a deposit of 5% after Help to Buy ends in 2023.
Lenders often set a minimum deposit amount of 15 or 25 percent for new construction, making them out of reach of first-time buyers.
This is because they can quickly lose their value once they are bought.
The Help to Buy scheme accomplished this by giving first-time buyers loans from the government, making up 20 percent of the purchase price – but that would be closed in 18 months’ time.
Deposit Unlocked was initiated by the Home Builders Federation, which represents housing developers, as well as reinsurance firm Gallagher Re.
It aims to help first-time buyers climb the ladder and second-time buyers move up it.
However, the downside is that deposit unlocked loans are currently only available with a small number of homebuilders and mortgage lenders.
The plan was first heard about in June, when the Newcastle Building Society began offering deposit unlocked mortgages.
However, this was a pilot and was limited to only four plots in the north east, with a maximum property value of £330,000.
First major mortgage lender nationwide to commit to unlocked mortgage deposits
As with Nationwide, this scheme is available through mortgage brokers on standard new construction loans of between £25,000 and £750,000.
The nature of the plan means it will be limited to homes built by builders who have signed up for Deposit Unlocked – and will announce it nationwide when it launches in the coming weeks.
We explain how this plan works and who can use it.
Why can’t I borrow as much on a new build?
Expert View: ‘Great news for buyers’
Mortgage broker Nicolas Mendes at John Charcoal
“The new nationwide scheme is an encouraging sign, as we see lenders re-entering the market for 5 per cent deposit mortgages.
“This is great news for buyers as more options become available to help secure the property.
“This allows them to make purchases with a 5 per cent deposit, which is not through a government-backed mortgage or Help to Buy scheme, only on newly-built properties.
‘This means you can be a home mover or a first time buyer to reap the benefits.
‘Eligibility is based on nationwide standard affordability criteria and is not limited by government affordability stress tests, which factor into servicing HTB loans after the first five years.
Although there are some limitations. Primarily, the scheme is not suitable for self-employed applicants or individuals who, upon completion, will own another property, for example buy-to-let.’
Lenders are often uncomfortable about pledging mortgages to new-home buyers. This is because the asset will usually lose some of its value in the first few years.
While the first buyer of a home is often willing to pay a premium to acquire a new property, the second buyer will not have the same benefit and therefore will often not be as valuable.
It can be difficult to sell a newly-built home for this reason, and it’s a concern with some lenders—because if a buyer doesn’t pay their mortgage and the home is taken back, the home can be sold. Will be down for them eventually.
This means that new-home buyers often need to save a larger deposit than those who buy older properties.
Those buying new-built flats may also be asked to pay more than new-built homes, as pricing them can be difficult for mortgage lenders.
How does Deposit Unlocked overcome this?
When giving mortgages on homes they consider more risky, lenders sometimes take out insurance, known as indemnity.
This means they can cover some of the costs if the home is occupied, and they can’t sell it for an amount equal to the outstanding mortgage – but it costs them money to take out this insurance. .
Under Deposit Unlocked, homeowners would pay to insure mortgages instead of lenders – using a portion of the money they get from selling homes to do so.
The theory is that it would make lenders more comfortable pledging new-builds.
Which Home Deposits Are Eligible For Unlocked?
One of the main restrictions before the buyers would be that they can buy a home only from a builder who is participating in the deposit unlock scheme.
HBF says 17 of its member housebuilders are part of the scheme, and these companies account for 60 percent of all homes built in the UK – so it looks like some big household names will be involved.
As part of the Newcastle Building Society pilot, Barrett Developments, Bellway, Keepmot and Wistry all sold the homes.
However, we don’t yet know whether builders who signed up for the full plan will offer deposit unlocks on all of their sites, or only a small number.
Help to Buy previously offered a route to home ownership, but it will be discontinued.
The fact that only two lenders are signed up right now will also limit buyers’ ability to use the plan – as well as it could mean that they…