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What is the Deposit Unlock Scheme?

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It’s no secret that UK property prices are continually increasing.

This makes taking that first step into home ownership very difficult.

Is there a way that could it easier?

The Deposit Unlock Scheme aims to do this.

In the article below, we have explained exactly what the scheme is and its advantages and drawbacks. 

What is Deposit Unlock?

The Deposit Unlock Scheme is a mortgage scheme that enables people in the UK to purchase a property with just a 5% deposit.

Only certain lenders participate in this scheme, which also involves partnerships with specific building companies.

The Deposit Unlock Scheme is only for new-build properties.

It makes purchases possible at such a low rate because the building’s developer pays into an insurance policy for the buyer’s mortgage provider.

This reduces the bank’s risk, which makes them willing to lend mortgages.

Why was the Deposit Unlock Scheme introduced?

The Deposit Unlock Scheme primarily exists to make it easier for people to get onto the housing ladder.

Secondly, new-build properties are considered riskier for banks to lend money on. This is because they cannot be guaranteed to maintain their initial value over the first ten years.

Finally, it helps replace the ‘Help to Buy’ initiative, which is no longer active in the UK.

Advantages of the Deposit Unlock Scheme

1. Better interest rate for buyers

The Deposit Unlock Scheme enables buyers to get a better interest rate on their mortgage than they would typically be able to achieve with just a 5% deposit.

This means that the monthly payments will be lower than they would be without the initiative.

2. Buyers retain initiative

As a second advantage, even though the building developer contributes towards an insurance policy, you still retain 100% ownership of the house once your mortgage is paid off.

This unlocks some other initiatives (such as Shared Ownership) in which reducing your payments is balanced out by you owning less of the equity in the house.

3. High-quality housing

A third advantage of Deposit Unlock is that it enables more people to purchase a new-build home.

New builds are typically in better condition than older properties and meet more modern regulation standards.

Disadvantages of the Deposit Unlock Scheme

1. Not universally available

It is important to remember that not all lenders and new-build developers are involved with the scheme.

This means that, even if you have a specific new-build house in mind, you might not be able to capitalise on Deposit Unlock.

2. Higher provider rates

Similarly, you will be limited to the mortgage offers you are able to consider, since only a select few lenders are taking part in the initiative.

This may impact the interest rate you get, since the smaller banks are often not able to offer as favourable rates.

3. Relatively expensive

Furthermore, even though you are getting a slightly better interest rate than a 5% deposit would typically get you, it is still not a large deposit.

This means that the mortgage will be far more expensive than it would be if you saved up for a larger deposit.

According to Nationwide, you are only able to capitalise on Deposit Unlock if you are borrowing between 90% to 95% of the house’s value.

So, people who have saved up more than this will not be eligible. Some argue that this de-incentivises potential buyers from saving up for longer for a larger deposit (which may be financially better for them in the long run).

You can usually not access the Deposit Unlock Scheme if you own another property upon completion. For example, a holiday home, your parent’s home, or a Buy to Let.

Do all mortgage providers offer Mortgage Unlock?

Not all lenders offer the Deposit Unlock Scheme, so you should do some research to confirm which ones are applicable.

At the time of writing, some of the largest mortgage providers that offer the initiative are:

  • Nationwide
  • Newcastle Building Society
  • Accord

Many smaller providers offering this initiative cannot provide as competitive rates as major lenders. Therefore, your options may be limited. 

Alternatives to the Deposit Unlock Scheme

Since ‘Help to Buy’ is no longer available in the UK, there are fewer alternatives to getting onto the property ladder besides Deposit Unlock.

However, a couple still exist.

1. Shared ownership

Shared ownership is a well-known scheme that enables you to purchase a part of a home but not all of it. This means you pay rent on the part you don’t own.

This enables you to get your foot into the door and then ideally increase your ownership (known as ‘staircasing’) further down the line.

2. First homes initiative

As a second solution, the first homes initiative allows some first-time buyers to buy a house for 30% to 50% less than the typical market value.

This scheme is only available in England to people aged over 18, who can get a mortgage for at least half the value of the home and whose income is below £80,000 (or £90,000 if the property is in London).

3. Meeting the highest requirements

Some lenders may enable you to get onto the housing ladder with a 0% deposit if your salary is large enough and you also have a Guarantor.

This is a risky method of home ownership, though. It can strain your relationship with the Guarantor and have a very high interest rate.

4. Right to buy

A fourth option is right to buy, which enables the renter of a council flat to buy it at a considerable discount. This once again makes it significantly more affordable.

Should I use the Deposit Unlock Scheme?

If you are finding it challenging to save up a large deposit, but are determined to get onto the housing ladder, then Deposit Unlock could be worth considering.

On the other hand, if you can save up a larger deposit, it is recommended that you do so.

Even if it takes you a few more months or perhaps even years, it means that the mortgage will be more affordable when you finally get one.

You should also research the other financial schemes that can assist buyers (listed above).

Speak to a qualified expert for more guidance.

Sell your inherited property today

If you have inherited a property via probate, but have questions about what to do next, then you are in the right place.

Click on this link to learn how your inherited property is valued, and click here to see whether you have to pay Capital Gains Tax on inherited property.

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