Deposit Unlock - all you need to know about the deposit unlock scheme
What is Deposit unlock?
Deposit unlock is a new 95% Loan To Value (LTV) mortgage product being offered to homebuyers of new build homes.
Why is deposit unlock needed? Aren’t there already lots of 95% LTV mortgages on the market?
Whilst there is an increasing number of 95% LTV mortgage products on the market, these are focused on existing or second-hand homes. Many lenders are wary of lending at 95% LTVs on new build properties because of the so-called ‘new build premium’. Just as a brand new car loses value once driven off the forecourt, many believe that the value of new homes has a high risk of falling compared to second-hand homes, because of the risk of many similar homes being on the market at the same time. During the Global Financial Crisis of 2008-09, many homebuilders heavily discounted the price of their homes to sell them, and this behaviour has made mortgage lenders nervous.
How does deposit unlock work?
From the perspective of a homebuyer, deposit unlock works like a normal 95% LTV mortgage. The homebuyer supplies a 5% deposit and takes out a mortgage for the remaining 95%.
However, because of the perceived additional risks relating to new build properties, behind the scenes the homebuilders are providing (and paying for) a mortgage indemnity scheme to insure the mortgage lender against the risk of falling house prices. The homebuilders hope that by providing the mortgage indemnity guarantee they will encourage more lenders to offer 95% loan to value mortgages on new build properties.
How much can I borrow with deposit unlock?
The deposit unlock scheme lets you borrow up to 95% of the value of the home you are buying. If the home cost £150,000, you could borrow up to £142,500, leaving you to provide a deposit of £7,500.
However, most lenders have strict lending multiple guidelines. This means that very few lending will lend above 4.5x your income and only 15% of mortgages issued by a lender can be at lending multiples at or above 4.5x your income.
You can use the Twindig mortgage calculator below to see what your mortgage payments might lool like.
Are all new homes eligible for deposit unlock?
Unfortunately not, only those built by homebuilders who are participating in the deposit unlock scheme. As of 7 October 2021, the Homebuilders Federation (HBF) says that 17 of its members are participating in the scheme. Whilst currently that is not many housebuilders, it is most of the largest housebuilders in the UK and this 17 account for more than 60% of the new homes market in the UK. So, there should be plenty of choices. As the scheme matures and more lenders get involved, we expect more housebuilders to sign up for the deposit unlock scheme.
Which homebuilders have signed up for the deposit unlock scheme?
At the time of writing, we found the following housebuilder who had signed up for the deposit unlock scheme:
Which lenders have signed up for the deposit unlock scheme?
At the time of writing we found the following lenders offer deposit unlock mortgages:
We expect more national and regional lenders to get involved as the scheme matures
Why do we need Deposit unlock when we have Help to Buy?
Good question! The Help to Buy scheme is coming to an end in March 2023 and the Government is currently saying that it won’t be extended. Housebuilders are therefore looking for alternatives to Help to Buy to fill the gap when the scheme closes.
Did the change in Help to Buy rules lead to Deposit unlock?
The Help to Buy Rules changed on 1 April 2021, restricting Help to Buy to First Time Buyers only (previously home movers could also use the scheme) and it introduced regional house price caps rather than one price cap for the whole country.
Existing homeowners are therefore no longer allowed to use Help to Buy and Deposit Unlock is one of the alternative mortgage products being offered by housebuilders to fill the gap left by the reduction in eligibility of Help to Buy.
Why was the Help to Buy Scheme changed in April 2021
The Help to Buy scheme was changed to focus it on those that needed ‘help to buy’ the most. The UK Government is keen to encourage homeownership and to help aspiring first-time buyers to buy their first home. This is why the scheme was restricted to First Time Buyers.
The introduction of regional price caps was also to focus help to buy on those that needed it most to get onto the housing ladder rather than those looking to be able to afford a bigger home.
Help to Buy is a scheme for new build properties where the UK Government offers an equity loan of up to 20% of the value of the home, which when coupled with the home-buyers minimum deposit of 5% leads to the homebuyer only requiring a 75% LTV mortgage.
What is the new build premium?
The new-build premium is the perception that when a new build home is sold for the first time, it is priced higher than an equivalent second-hand home. Part of the premium may reflect that it is the first time home buyers have been able to buy a home in a specific location. Also when buying a new home all the appliances, carpets, boilers etc are brand new with no wear and tear and this is not the case when the initial owners sell their ‘new’ home and it is normally not true for similar second-hand homes that are on the market.
How does deposit unlock differ from shared ownership?
With Deposit Unlock the homebuyer is the legal owner of the whole property (100% of it). With shared ownership, and the clue is in the name, the ownership is shared, typically between the homeowner and a Housing Association or Registered Provider.
Which is better deposit unlock or shared ownership?
Whether deposit unlock or shared ownership is better for you will depend upon your individual circumstances, your attitudes to homeownership, what you can afford and the available homes for sale in the area that you want to live. Both provide a way to help you buy a new home and we recommend that you get advice from a specialist such as Metro Finance or an Independent Financial Advisor (IFA), the FCA has advice on how to find an IFA.
Does deposit unlock solve the problem of deposits for first-time buyers?
Unfortunately not completely. Perhaps it would be more accurately named 'New build-unlock' as it provides a 95% LTV mortgage for a new build home when many lenders won't lend at the same high LTVs on new homes as they do on second-hand homes.
In our view, the first-time buyer will continue to be constrained in their house purchasing aspirations by the maximum income multiple the lender is willing to use. Any shortfall between mortgage capacity and house price will need to be made up by a home buyer's deposit, and often, unfortunately, a 5% deposit will not be large enough to bridge that gap.
Help to Buy does solve the deposit problem for many homebuyers but is only available on new build properties.