Can you buy a new build with a 5% deposit?

What is a 5% deposit?

The deposit required for new build homes can also be as low as 5% thanks to deposit schemes like Deposit Boost and Deposit Unlock. The remaining 95% of the home’s purchase price can be mortgaged and repaid over time.

Typical deposit expectations

Typically, buyers are expected to put down at least a 10% deposit, or more if they can afford it. The higher your initial deposit, the less you need to borrow for your mortgage, which signals to lenders that you are low risk. A larger deposit can also lower the interest rate offered on your loan.

What does a 5% deposit look like?

Here are some examples of how much you can expect to save for a 5% deposit:

• On a £300,000 home, a 5% deposit would be £15,000

• On a £500,000 home, a 5% deposit would be £25,000

Deposit, purchase price and loan-to-value (LTV): What’s the difference?

• Your purchase price is the total value of your home

• Your deposit will be a percentage of this amount

• Your loan-to-value (LTV) is the percentage of the amount left to pay (i.e. your total mortgage value)

For example, with a 5% deposit, your LTV would be 95%.

Is a 5% deposit rare?

A 5% deposit means you’ll need to borrow more, which presents a higher risk to lenders. Buyers may face higher mortgage interest rates with a smaller deposit contribution. However, thanks to various schemes and government funding, there are more ways for buyers to get onto the property ladder with a 5% deposit.

Mortgage schemes and government help for low deposits

There is mortgage support available to buyers, such as the Deposit Boost scheme and the Help to Buy scheme, which is available in Wales. Learn more about the different schemes here.

Help to Buy in Wales

With the Help to Buy scheme in Wales, you can buy a brand-new home with a 5% deposit. This applies to both existing homeowners and first time buyers on homes up to £300,000. The Government lends buyers up to 20% of the property value, and the loan is interest-free for five years to help with affordability. With this scheme, your mortgage would have an LTV ratio of 75%, rather than 95%.

Shared Ownership

If you’re struggling to afford a larger deposit, another option is Shared Ownership. For Shared Ownership homes, you can pay 5-10% of the share of the house that you are buying, lowering your deposit costs even further. You will purchase a share between 10% and 75% of the home’s full market value and pay rent for the remaining amount.

For example, if you were buying a 25% share of a £300,000 home, your share value would be £75,000. The cost of a 5% deposit for this property would be £3,750, with the remaining balance payable in monthly instalments.

Deposit schemes

Deposit Unlock allows first time buyers and existing homeowners to purchase a new-build home with a 5% deposit. This scheme is only available on new builds worth up to £750,000.

Deposit Boost is another scheme available to existing homeowners and first time buyers. It’s typically offered on new builds, where a housebuilder will match your 5% deposit, giving you 10% to put towards your new home. This reduces your LTV ratio from 95% to 90%, meaning lower mortgage repayments.

How to qualify for a 5% deposit

Both first time buyers and existing homeowners will need to qualify for a 5% deposit. There are a couple of ways to increase your chances:

• Strengthen your credit profile. Improving your credit score and overall credit report by paying bills on time or registering to vote will help you appear lower risk to lenders.

• Reduce other financial commitments like loans or credit card debt. Lenders will assess your financial situation, so it is important to reduce any loans or debt you may have to improve your chances.

• Get a Mortgage in Principle early. With an estimate of how much you may be able to borrow, you can get an idea of whether you will qualify for a 5% deposit or not.

The disadvantages of 5% deposits

Lenders may view your 5% deposit as higher risk than someone with a larger deposit, so there are a few disadvantages to be aware of:

• Higher interest rates. Due to the higher financial risk associated with a lower deposit, this can lead to higher interest rates.

• Negative equity. If your house price drops below your outstanding mortgage balance, you are at risk of negative equity, which can impact your ability to move to a new property.

• Impact of unexpected expenses. There will be other costs when moving into a home, so you should budget for these alongside your deposit.

What do lenders require from you?

Lenders are taking a risk when they offer you a mortgage. To cover themselves, they will conduct financial checks.

Lender risk and underwriting criteria

Mortgage underwriting is a key stage in the mortgage process. This is when your mortgage eligibility is assessed based on factors such as your financial circumstances. Underwriting in mortgage terms is when lenders assume financial risk when providing loans to buyers. Therefore, mortgage underwriters need to be sure that you will be able to make your repayments.

Affordability checks

Lenders will assess your ability to make mortgage repayments through affordability checks. This will look at your credit report, including your credit score, financial history, and repayment history. Lenders also look at your income to determine whether you can afford the repayments each month.

Why you may be offered higher mortgage interest rates

If lenders determine you to be high risk due to a poor credit score or an unstable income, they may offer you higher interest rates on your mortgage repayments.

At Barratt Homes, we have a range of offers to help you move. From schemes like Deposit Boost and Deposit Unlock, to our Own New - Rate Reducer initiative, we are here to help first time buyers and existing homeowners.

Ready to buy? Explore our new homes and start your homebuying journey today.