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95% Mortgages Explained

April 21, 2021

Homebuyers with small deposits are set to receive assistance to successfully enter or climb the property ladder, thanks to a government initiative called the mortgage guarantee scheme.

As outlined by Chancellor Rishi Sunak, the new scheme is designed to provide a 95% mortgage for properties with a value of up to £600,000, meaning that you would only have to secure it with a 5% deposit.

The inevitable economic consequences resulting from the Coronavirus have caused lending institutions to significantly tighten their eligibility criteria, causing low deposit mortgages to all-but disappear.

First-time buyers have had a particularly difficult time in this tumultuous market, with almost all of the 95% mortgage offers being retracted by banks and building societies as they scale back their level of risk. According to market analysis by Halifax, in 2020, the number of first-time buyers fell by 13% compared to the year before - a drop of more than 46,000.

What is the new mortgage guarantee scheme?

The new mortgage guarantee scheme will allow for 95% mortgage options to re-enter the market. The government will be offering lenders a guarantee to cover 95% of the loan, effectively promising to provide compensation to the lender in the event that you were to default on your loan repayments.

The scheme was first announced during a speech by Prime Minister Boris Johnson in October 2020, forming part of his commitment to ‘turn Generation Rent into Generation Buy’.

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

Related: Summary Of The 2021 Budget And What It Means For The Property Sector

What is a 95% mortgage?

A 95% mortgage allows you to borrow up to 95% of a property’s purchase price, whilst only having to put down 5% of your own money as a deposit.

Sometimes referred to as a 95% Loan-to-value (LTV) mortgage, this lending option only requires you to come up with a 5% deposit and thus makes it easier for new buyers to enter the market.

Having a smaller deposit may limit your choice of mortgage lender, but thanks to the new government guarantee, it will again be an option for those struggling to save for their deposits.

The lowest interest rates for mortgages are typically reserved for those who can provide larger deposits of 40% or more, nevertheless, there are currently some competitive deals on offer for those with only 5% saved.

When will the new scheme launch?

Now! The scheme officially rolled out on Monday 19th April 2021, and will be open to new mortgage applications right through until December 2022.

Major lenders such as HSBC, Barclays, NatWest, Lloyds and Santander have joined the scheme immediately, with other key lenders, like Virgin Money, expected to get involved very soon.

All lenders are now offering mortgages with a fixed interest rate for five years or more, to provide added security for buyers, while the government guarantee itself will be offered for up to seven years after the mortgage is secured. After this time, lenders would revert to being liable for any losses resulting from a borrower defaulting on their loan repayments.

Who is eligible?

It’s a hot topic and somewhat controversial, nevertheless the scheme has been made available to anyone looking to purchase a home and not only for the first-time buyer. Here are some other eligibility criteria:

  • The property must be valued at £600,000 or less
  • Unlike the Help to Buy Equity Loan Scheme, the house doesn’t have to be a new build
  • The mortgage itself will be subject to all usual lending criteria
  • Applicants will have to satisfy the normal standards of affordability to justify their requested level of borrowing
  • There will be no interest-only options - every mortgage under this scheme will need to be a repayment-based mortgage
  • The property must be for the purpose of a primary residence - this offer does not extend to those seeking to buy a property for the purpose of renting it out
  • The loan can only be acquired by a private individual and not by a company


How does the scheme work?

In order to access the scheme, your deposit needs to be between 5% and 9%. Once you have had an offer on a house accepted, you then apply for a loan with an applicable bank (one that has opted into the scheme) - if you are unsure, you can always seek the guidance of a mortgage advisor at Portico Finance. We are happy to help and answer any questions you may have, you can give us a call on 07824 353803!!.

Let’s say you have a deposit of 5% and the government guarantees 15% of the loan, to the bank, it’s rather like receiving a full 20% deposit, which lenders like because it reduces their risk.

Even though it’s a government-based scheme, the lender arranges it all on the homeowner’s behalf, so no direct government applications are necessary from the lender’s point of view. There is a commercial fee for each mortgage within this scheme, payable by the lender. It is likely that this fee will increase the overall cost to the homeowners, either through product fees or interest rates.

It is important to understand that this guarantee is only designed to protect the lender. All other aspects of the mortgage will work in the same way as any other traditional mortgage.

Should you still save for a larger deposit?

The greater the deposit saved, the wider the choice of mortgages and the lower the interest rates offered. So, ideally yes, if you can save more than 5% then it could be worth the wait.

However, if you are renting at the same time, you may prefer to get the ball rolling sooner rather than later, and stop sinking your money into your rental payments. You also run the risk of house prices rising, further delaying how long it would take you to save a sufficient deposit.

We’d all like a crystal ball when it comes to the property market, and only you can know based on your circumstances which path is better suited to you.

Could this scheme affect property prices?

High LTV mortgages backed by government guarantees doesn’t necessarily spell good news for the housing market. When banks are nervous about lending to buyers with small deposits, it can be because they are concerned that property prices are about to fall.

While it is a welcome help for many borrowers to get onto the property ladder, when the government essentially starts artificially supporting the market, it can result in a drop in house values once the help is withdrawn. This would leave buyers at higher risk of negative equity once the scheme closes.

That said, these guarantee schemes can also cause property prices to rise. When more borrowers are given increased purchasing power, it can revitalise the market and push prices up. According to Rightmove, average asking prices hit a record high of £327,797 in April, over £4,000 higher than the last record set in October 2020.

They went on to announce that on Wednesday 7th April, their site experienced a staggering 9.3 million visits: “In a sellers’ market this hot, even 145,000 new property listings this month has not been enough to meet the high levels of buyer demand that we are seeing. More houses have sold within the space of a week than ever before.”

How successful will it be?

Based upon the previous 2013 implementation of a mortgage guarantee scheme, Steve Jackson, Financial Services Manager at Portico Finance, says that he believes that the scheme should successfully provide more choice for potential buyers who are struggling to save larger deposit amounts.

“Many first-time buyers weren’t able to take advantage of government incentives like the stamp duty holiday, so this scheme will be good news for them,” he said. “It will also help to support the market at a particularly difficult time. Though the market may be affected at the close of the scheme, there are large numbers of potential buyers who have been desperate to enter the market or move, and this opens up the doors to new options.”

Get in touch

Are you a first time buyer looking to get on the property ladder? View our wide range of London property for sale, or give us a call on 020 7099 4000 to find out how we can help with your search. !!

You can also get in touch with our mortgage experts at Portico Finance if you have any questions about 95% mortgages on finance@portico.com or 07824 353803. !!

If you are considering selling your property while the market is hot - or if you’re just curious - our online property valuation tool can give you an instant estimate in just 60 seconds.


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