With average house prices outstripping average salaries by many multiples, it has become increasingly difficult to save up enough money to put down a deposit on a property. In an effort to help people onto the property ladder, the government has announced a new mortgage guarantee scheme to increase the number of mortgages available with just a 5% deposit. But is it really a good idea?

Before the pandemic struck, 95% mortgages — or 95% loan-to-value (LTV) deals, as they’re also known — were widely available across the property market. However, although the market has started moving again since lockdown lifted, there are far fewer 95% LTV deals now than there were before. This is because lenders perceive them as being more risky, and the chance of a negative equity situation is higher for people who have smaller deposits.

Because of this, the government has introduced its new mortgage guarantee scheme. The idea is to encourage lenders, by reducing the risk of high LTV deals.

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Generally speaking, mortgages available through the new government scheme will be similar to standard mortgages, although borrowers may find that interest rates on these deals are fractionally higher. The introduction of the scheme should make it significantly easier for low-deposit borrowers to find a mortgage suitable to their needs. It’s considered to be an effective way of getting first-time buyers onto the first rung of the property ladder, and a similar scheme that ran between 2013 and 2017 enabled some 80,000 first-time buyers to get a mortgage.

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As long as house prices continue to rise, the risk of an LTV mortgage can be seen as acceptable. However, the property market can be fickle, and if prices fall many LTV borrowers may find themselves in a situation of negative equity. This means that they would owe more money than their home is worth.

Under the new government scheme, lenders will offer fixed-rate mortgages with terms of up to five years. This period of time should allow enough equity to build up in the property to cover any modest falls in value before the borrowers need to remortgage. But, it’s worth remembering, that the interest rates on LTV deals can be high, so if you can in any way increase the amount of your deposit, you could be looking at a much cheaper mortgage. Increasing your deposit level to 10 or 15% could make a significant difference. The government-backed LTV schemes may also incur additional costs and fees due to the administration involved.

However, if you’re a first-time buyer and you can only scrape together the 5% deposit, the new scheme could make all the difference. Talk to your mortgage adviser to find out if the scheme is right for you.