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What is the Deposit Unlock Scheme?

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It is widely agreed that properties have become more and more unaffordable. For the average first-time buyer, it is difficult to raise enough funds to make a sizeable deposit – and this means that, even for those who do manage it, the monthly repayments will be extortionate.

Therefore, potential buyers must be aware of approved schemes that might make getting onto the property ladder easier.

The ‘Deposit Unlock Scheme’ is a relatively new initiative in the UK. Still, it could be invaluable for helping you to purchase a new-build property. Keep reading our blog below for all the details about this initiative.

What is Deposit Unlock?

Deposit Unlock is an initiative that enables you to buy a new-build house with only a 5% deposit. This is made possible because, when you complete the purchase, the building’s developer pays a percentage of the purchase price into an insurance policy for your mortgage provider. This reduces the bank’s risk and, therefore, makes them willing to give you a mortgage.

Why was the Deposit Unlock Scheme introduced?

A typical bank is more strict on the amount that they lend on the purchase of a new build. This is because newly built properties usually decline in value over the first few years. However, the Deposit Unlock Scheme gets around that and reduces the risk for the lender.

Deposit Unlock Scheme is also particularly timely due to the ‘Help to Buy’ initiative closing for new applicants in recent years. Since buyers can no longer use that as a means of getting onto the property ladder, finding other ways of making a purchase affordable has become increasingly important.

Advantages of the Deposit Unlock Scheme

One of the main advantages of Deposit Unlock is that you (the buyer) can get a more favourable interest rate than you would usually be able to secure with a 5% deposit. This makes the mortgage less expensive for you compared to what it would be without the scheme.

This scheme also allows people who might otherwise be unable to afford it to get onto the property ladder. If you can only save a 5% deposit – and even then, the monthly repayments will be steep – then the Deposit Unlock Scheme may open a door that might otherwise be closed to you.

Furthermore, even though the building developer is contributing towards an insurance policy, you still retain 100% ownership of the house once your mortgage is paid off.

Major banks such as Nationwide allow you to borrow up to £750,000 using the scheme. With the average house price in the UK currently being £264,400, this means that the vast majority of new build properties will be applicable for the scheme.

The scheme also makes it easier for you to buy a new-build property, which will statistically be in better condition than an older house. This means that not only does it help you get onto the property ladder, but your new house will hopefully be in good condition, giving you a reasonable standard of living.

Disadvantages of the Deposit Unlock Scheme

There is a list of participating building developers in the UK who are involved with the scheme. This can limit your options because if the house you want to purchase was not built by one of the selected developers, you cannot benefit from the scheme.

Not all mortgage lenders are involved with the scheme, too, which can also limit your options.

Furthermore, even though you are getting a slightly better interest rate than a 5% deposit would normally 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. The scheme may also de-incentivise potential buyers from saving up for slightly longer and getting a better deal.

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.

Which mortgage providers offer the Deposit Unlock Scheme?

Not all lenders offer the Deposit Unlock Scheme, so you should carry out 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 and Accord.

Alternatives to the Deposit Unlock Scheme

There are plenty of alternative options to the Deposit Unlock Scheme, which enable you to purchase a property with a slightly more favourable rate. These include Right to Buy, Shared Ownership, and the First Homes scheme.

‘Right to Buy’ is when a tenant in a council flat can purchase their own property at a slightly discounted rate. If it is your main home, you are a secure tenant, and you have lived under a public landlord for at least three years throughout your life, you may be eligible for the initiative.

Shared Ownership is when you take out a mortgage on a percentage of the property and continue to pay rent on the remainder. For example, if you can only afford 75% of the house, then you can pay 25% rent and at least own some equity in the property. You will then be able to purchase additional shares in the house further down the line (known as ‘staircasing’) if you want to and can afford it.

Lastly, the First Homes initiative is for first-time buyers, who may be able to purchase their existing property 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.

Should I utilise the Deposit Unlock Scheme?

If you have saved up a small deposit but are struggling to save up any more, then you may want to consider the scheme. Perhaps your costs have increased recently – for example, due to the UK cost of living crisis – but you still want to get onto the property ladder. This might be an opportunity moment to utilise Deposit Unlock.

On the other hand, if you have the means of saving up a larger deposit, then 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. As listed above, these include Right to Buy, Shared Ownership and First Homes. Any of these may be slightly more applicable to your situation than Deposit Unlock, so you should get a clear sense of all your options first.

For example, if you have recently inherited money – such as through probate – then using this as a deposit on a house may be a worthwhile investment. However, in an ideal world, you will speak to a qualified financial advisor or property expert who can provide advice tailored to your situation.

You should also reach out to anyone you know who has used the Deposit Unlock Scheme before, as this may offer useful insight.

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