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Do you want to buy a new build home with a 5% deposit? Sad about the Help to Buy equity loan scheme ending? Look no further…
Deposit Unlock is a scheme set up by the Home Builders Federation in association with reinsurance firm Gallagher Re; it isn’t a Government set-up like Help to Buy was.
The scheme enables you to buy a new build home with just a 5% deposit by providing reassurance to the lender.
It’s still a relatively new scheme so, in time, more developers and lenders should come on board.
How does Deposit Unlock work?
A lot of lenders are reluctant to offer a 95% mortgage on a new build property. This is because things that are new usually decrease in value once they become ‘used’. Think about a brand new car – it starts losing value as soon as you drive it off the sales lot.
This depreciation means a bigger deposit is normally required, because if you only put 5% down and the value of the house drops, you could end up owing the bank more than the house is worth. That’s known as being in negative equity and, in these instances, the bank can’t then sell the property to recoup their costs should you stop paying them back.
Deposit Unlock gets around this.
The builder uses part of the purchase price to pay for an insurance policy on behalf of the lender. This policy lasts for seven years and protects them against a proportion of any potential loss should you default on payments.
It is important to note that the insurance policy does not protect you from repossession.
Who is eligible for Deposit Unlock?
You must be:
- 18 or older
- a first-time buyer or home mover
- able to get a 95% mortgage from one of the lenders partaking in the scheme
- buying a specially selected plot from one of the builders on the scheme (not every plot on every development will be available to buy via Deposit Unlock)
- borrowing less than £750,00
You cannot use this scheme if you will own another property on completion, i.e. a buy to let. In addition, you cannot use another scheme, like shared ownership, alongside Deposit Unlock, apart from Forces Help to Buy.
How does the process work?
You need to look specifically for a Deposit Unlock property with a participating builder. You can find a list of those builders on the Home Builders Federation website.
Once you have found one you want to buy and have had an offer accepted, the developer will issue you with a loan confirmation letter that you need to pass on to your mortgage broker and lender. This letter confirms the property is on the Deposit Unlock scheme.
You can apply for a mortgage with one of the lenders who will accept the scheme. Each lender has their own criteria in relation to things like maximum price and self-employed income, so be sure to check your eligibility before paying to reserve a plot, especially as the number of lenders is currently very limited. The rest of the process will be the same as buying any property.
Your home in the future
The Deposit Unlock scheme only applies on the very first purchase. The house or flat then ‘falls out’ of the scheme on future sales, so you are free to sell it on the open market.
Likewise, when you come to remortgage, it will be classed as a ‘normal’ remortgage. You would not need to mention the Deposit Unlock scheme to a new lender.
Pros and cons of Deposit Unlock
Pros
- You can buy a new build property with a 5% deposit
- The builder pays for the insurance policy, not you
- No additional repayments, unlike the Help to Buy equity loan
- No restrictions on future resale
- Limited to new build properties, which are often sold at a premium and are subject to high competition
- Limited availability of plots on the scheme
- Low number of banks currently willing to lend on this scheme
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