The introduction of the Deposit Unlock scheme has generated a buzz in the housing market, presenting an intriguing opportunity for lenders. The new scheme promises an enticing shortcut to homeownership that requires just a 5% deposit, therefore giving lenders access to a new pool of borrowers. While the potential gains are tempting, it’s essential that lenders consider any associated risks before deciding to participate in this potentially lucrative venture.

What is the Deposit Unlock Scheme?

The Deposit Unlock scheme is a private initiative led by the Home Builders Federation that helps first-time buyers and existing homeowners purchase new-build homes with a smaller deposit than usual. Under the scheme, borrowers can buy a new home with just a 5% deposit rather than the typical 15-25%. This mitigates one significant barrier to getting onto the property ladder, especially for those with limited savings.

The Deposit Unlock scheme works by having the housebuilder pay for an insurance policy that protects the mortgage lender if the property decreases in value in its early years. This allows the lender to offer a competitively priced mortgage with a higher loan-to-value ratio. Borrowers still need to meet the lender’s affordability criteria and the property must meet the scheme’s eligibility requirements.

On the bright side…

• Expanded borrower pool: This initiative grants access to a previously untapped segment of borrowers who were previously constrained by the higher deposit barrier. This broadened demographic presents a compelling avenue for increased loan volume and market share acquisition.
• Potential market share gain: Participating lenders can establish themselves as progressive and innovative players in the market, attracting customers who want flexible and accessible homeownership solutions. This proactive stance can foster brand loyalty and a competitive edge.
• Diversification: By embracing the Deposit Unlock scheme alongside traditional offerings, lenders may achieve a more balanced and resilient portfolio. This diversification mitigates exposure to potential market fluctuations, supporting long-term financial stability.

Potential concerns to consider:

• Increased risk profile: The inherent association between lower deposits and higher loan-to-value ratios necessitates a comprehensive re-evaluation of risk management frameworks. Careful consideration must be given to potential delinquencies and defaults within this segment.
• Unfamiliar territory: The scheme brings new regulations and greater operational complexity, which in turn will demand adjustments to existing underwriting and operational processes. It will be necessary to streamline these adaptations while ensuring regulatory compliance for an efficient execution.
• Uncertain long-term impact: The scheme’s long-term impact on the housing market and its subsequent effects on lender risk profiles remain uncertain, requiring careful monitoring and assessment.

Points to consider: 

Lenders currently participating in the scheme include Accord Mortgages, Bluestone Mortgages, Nationwide Building Society and Newcastle Building Society. However, before joining the fray, lenders should consider the following questions:

• Are your risk management systems equipped to handle this new borrower profile?
• Can you adapt your existing processes to handle the scheme’s requirements, without compromising efficiency or regulatory compliance?
• Are you prepared to invest in educating your staff and adapting your marketing to suit this new segment?

Deposit Unlock presents both opportunities and challenges for lenders, meaning it is crucial to maintain caution amid market enthusiasm. While it opens doors to possible growth, the scheme also introduces uncharted risks. Lenders must weigh up these risks and rewards carefully, assess their internal capabilities and make an informed decision that safeguards the long-term stability of their organisation.

This is, however, an age of innovation in lending- in combination with initiatives (often led by Building Societies) such as Head Start, Family Assist or Buy for Uni, Deposit Unlock is at least showing that the mortgage market will find a way to support new lending and new borrowers.

To find out how the Deposit Unlock initiative and other legal issues could impact your business, contact TWM Solicitors for sector-focused advice. Our lawyers have considerable experience and understanding of all areas of the specialist lending market and work with various lenders, their funders and portfolio landlords.

TWM Solicitors advise lenders on an ‘as-needed’ basis with a ‘sense check’ service to clients for underwriting queries or issues raised by other borrower law firms.

Our lenders also benefit from regular training seminars on current topics and themes in the lending industry to help them remain up to date with the latest developments.

Lucy Farrow-Smith is an Associate in the lending department at TWM Solicitors LLP