Having directed England’s Help to Buy: Equity Loan Scheme, I have seen how the right support can help financially able people become homeowners. I’ve also seen that reducing deposit requirements doesn’t necessarily remove barriers to purchasing.
Since Help to Buy closed in 2023, lenders have launched an increasing number of low and no deposit mortgages.
Some now require as little as 2% or a fixed minimum, whichever is higher. Others offer low fixed deposit products in the region of £5,000, and a small number of lenders will consider mortgages of up to 100% loan-to-value.
First-time buyers need to understand the limitations of these products before including them in a plan.
1. A low deposit can still be a large amount
A 5% deposit on a house worth £300,000 is £15,000. Homebuyers may also need money for legal fees, surveys, mortgage fees, conveyancing costs and any applicable stamp duty.
So the total amount required could be closer to £20,000. For renters who already pay high housing and living costs, lowering the ratio does not necessarily make it easier to save the required amount.
Calculate the full initial cost early. The deposit advertised by a lender is rarely the whole picture.
2. Your mortgage may not cover the home you want
Some low deposit mortgages exclude new homes. Others place limits on the price of the property or type of home that can be purchased.
Lenders have understandable concerns about new appraisals. Adding to this caution are homebuilders’ incentives and the risks of holding multiple high loan-to-value mortgages on a single project. The result is that these restrictions can leave homebuyers with fewer suitable properties to choose from.
Check property criteria before viewing homes or making an offer. Being eligible as a borrower does not automatically mean the property will qualify.
3. Family-backed products are not for everyone
Some 100% mortgages require an immediate family member to share responsibility for the secured loan. This can help homebuyers who have relatives who are willing and financially able to support them. It does little for those who cannot access family wealth.
There are broader consequences to weigh as well. Failure to make a payment may affect a relative’s financial situation and create stress within the family. Homebuyers and relatives should understand the legal and financial responsibilities before proceeding.
4. The deposit may not be your only barrierp
Before applying, check whether the deposit is really the main reason you are unable to purchase.
Many renters assume they are not ready to buy because they do not have a deposit. But if they can afford the potential mortgage payments and meet a lender’s affordability criteria, the real hurdle may be simply building up the down payment while still paying the rent.
A mortgage advisor or independent financial advisor can help you determine how much you might be able to borrow and what deposit the lender will require.
Homebuyers can then compare this number to their current savings and what they can realistically put aside each month.
While closing the deposit gap is likely to take many years, the problem is not necessarily one of affordability. It is that there is no realistic way to build a deposit.
5. You may need a path before you need a mortgage
Low deposit mortgages help people who are already close to being ready for a mortgage. Many renters need support to get to this point.
Many aspiring homebuyers, numbering in the millions, can already afford the monthly payments required by a mortgage. What they lack is a realistic way to build a deposit while still paying the rent and meeting overall costs of living.
In these circumstances, the focus should be on finding a structured path that helps them bridge this gap and demonstrate their readiness for home ownership.
Private homes It is specifically designed to solve the deposit gap. Through the RentSaveOwn model, eligible homebuyers select the new home they intend to purchase and live in while building their deposit over a period of up to five years. Savings, affordability, and payment history are tracked during that period.
Every aspiring homebuyer’s path to homeownership looks different. A low deposit mortgage will solve the problem for some. For others, closing the deposit gap must come first.
Chris Lee is the former Director of the Government’s Help to Buy: Equity Loan Program and founder and CEO of rent-to-own provider, Own Homes.
