Self-Employed Mortgages With 5% Deposit

What factors determine how much deposit I'll need?

Each mortgage provider sets its own lending criteria, including the maximum LTVs they are prepared to lend at.

Some, more risk-averse lenders are stricter in the type of borrower they'll accept. Others lend to a wide variety of customers and are more flexible in their lending policy.

With that said, the main factors affecting how much deposit you'll need are:

1. The borrowing amount

Lenders tend to reduce maximum LTV's incrementally as the mortgage size hits certain thresholds. Often somewhere between £400,000 and £600,000.

2. The type of property you are buying

As mentioned above, banks, building societies and non-mainstream lenders will normally set lower maximum LTVs for leasehold properties.

3. Whether the property you are buying is a new build

There's an increased risk a new build could depreciate in value in the first few years because it's no longer new. To mitigate against the risk of less security, many providers require a higher deposit.

4. Whether you're on a repayment mortgage, interest-only, or part-and-part

To reflect the increased risk to the lender, a higher deposit of around 25% is often needed for interest-only mortgages.

5. Is the property to live in or rent out?

Buy-To-Let mortgages usually require a deposit of 20 - 40%.

6. Are you purchasing or remortgaging?

Some lenders limit remortgage deals to a slightly lower maximum loan to value. For example, 90% LTV compared to 95% for a purchase.

Where additional borrowing is required, many lenders will reduce their maximum LTVs further, especially if the extra borrowing is for debt consolidation.

7. Your income

Each lender has a Loan to Income (LTI) cap, usually around 4.5 earnings for self-employed applicants.

Here's an example. Karen is a sole trader and owns a flower shop. She's earnt £50,000 in each of the past two years and has found a 3 bedroom house she likes on the market for £300,000.

The bank lends up to 95% LTV. However they have a loan-to- income cap of 4.5 x earnings, so Karen can only borrow a maximum of £225,000, subject to an affordability assessment. Karen, therefore, needs a 25% deposit of £75,000 to buy the property.

8. Your employment status

Some mortgage providers restrict their maximum Loan to Income multiple for self-employed applications. This can affect the size of the deposit required.

9. Your credit score

If you have an adverse credit history, the maximum Loan To Value and LTI multiples available to you may be lower than for someone with a clean credit record.  The deals and rates available may not be as good either.

What government-backed schemes are available?

Yes. The two main schemes created and supported by the UK government are:

• The Mortgage Guarantee Scheme
• The Help To Buy: Equity Loan Scheme

The Mortgage Guarantee Scheme

Launched by the UK government in April 2021, the MGS is intended to increase the availability of 95% loan-to-value mortgage products.

During the pandemic, lenders were reducing their 5% deposit products, and this scheme was designed to address that. The guarantee itself is to the lender, not the borrower.

The scheme is open to first-time buyers, but also home movers and previous homeowners looking to buy a UK property on a repayment mortgage.

Certain criteria apply. The property you are buying must be to live in as your main residence, so a second home or a buy-to-let purchase isn't eligible. The property you're buying can't be a new build, or worth more than £600,000.

The scheme is scheduled to finish in December 2022.

The Help To Buy: Equity Loan Scheme

Unlike the Mortgage Guarantee Scheme, the government's Help To Buy: Equity Loan Scheme is for first-time buyers only.

With a 5% deposit saved, potential buyers can take out up to a further 20% (40% in London) equity loan, interest-free for five years.

The benefit of this is it allows you to get a cheaper 75% LTV mortgage and pay less interest overall, for the first five years at least.

For joint applications, both borrowers have to be first-time buyers. The Equity Loan Scheme also has property price caps, but these vary by region.

What are the key differences between the two mortgage schemes?

• The Help To Buy: Equity Loan Scheme is for property purchases in England only. The Mortgage Guarantee Scheme is UK-wide.
• Only new build properties can be bought through the Equity Loan Scheme. The Mortgage Guarantee Scheme can't be used for new builds at all.
• Previous homeowners can take advantage of the Mortgage Guarantee Scheme, but only first time buyers can use the Equity Loan Scheme
• The maximum property value is £600,000 for the Mortgage Guarantee Scheme, and varies by region for the Equity Loan

What are the pros and cons of a 5% deposit mortgage?

In today's housing market, many self-employed people understandably struggle to raise sufficient deposit. First time buyers, in particular.

Of course, the availability of 95% loan-to-value (LTV) mortgages makes it easier to get on the property ladder.

But primarily these schemes help maintain high house prices to the benefit of the banks and house builders. From a first-time buyer's perspective, lower house prices would be far more beneficial.

The disadvantages of a 95% LTV mortgage

It's also important to bear in mind there are many disadvantages to purchasing a home with just 5% deposit.

First, because you're borrowing more, it will take longer to pay the mortgage off, and you'll pay more in interest overall.

Second, the interest rate you pay will be higher, again making the mortgage more expensive overall.

Third, there are fewer mortgage deals available for self-employed applicants at 95% LTV than there are at 90%, 85% or 80% LTV.  

Though if you're buying a new build, the Help to Buy Equity Loan Scheme could be a potential solution.

The potential to go into negative equity

Finally, buying with a 5% deposit means you have less equity in your property. Should its value fall in the early years, you could find yourself in negative equity. This is where the property is worth less than the amount you owe on the mortgage.

The dangers of negative equity are two-fold.

1. You could struggle to move home as you'd need to find extra savings to clear the mortgage when you sell it.
2. Getting a remortgage deal could become impossible, leaving you trapped on the lender's Standard Variable or Follow On rate. Both of which would be more costly than a fixed-rate remortgage deal.

That's not to say that buying a home with a 5% deposit is inherently a bad idea. It's not. And it can often be the only realistic option.

But having an awareness of the potential drawbacks can at least help you make an informed decision.

Self-Employed Mortgages at 95% LTV

If you're self-employed and want to purchase a property with 5% deposit, Self Employed Mortgage Hub can help.

As an independent, whole-of-market broker with access to mainstream and niche lenders, your advisor at SEMH will quickly source the most appropriate deal for your circumstances. Saving you time, hassle, and potentially thousands of pounds.

To get your quote, call 0117 205 1695 between 9am - 5pm Mon-Fri,, or get started with our quick quiz here.