95% mortgages – here’s what you need to know

·5-min read
 (Unsplash)
(Unsplash)

Taking the first step onto the property ladder can be daunting. But as a first-time buyer struggling to amass a big enough deposit, it will come as welcome news to know that 95% mortgages are now, once again, freely available.

What is a 95% mortgage?

For many first-time buyers, meeting deposit requirements is the biggest hurdle to realising the dream of home ownership.

This is where a 95% mortgage can help, as with a home loan at 95% loan-to-value (LTV), you only need to raise a deposit of 5%.

The LTV is a ratio of a home loan relative to a property’s value. For example, a mortgage worth £190,000 on a £200,000 home has a 95% LTV. You then make up the 5% difference with a deposit – in this case, £10,000.

Return to low-deposit lending

During the uncertainty of the pandemic, banks became much more risk averse and many pulled their 95% mortgage deals.

But, with low interest rates and a buoyant property market, lenders are putting low-deposit deals back on the table.

This will give hope to buyers previously locked out of the housing market because they were finding it too tough to scrape together 10% or more of a property value.

What is the government’s Mortgage Guarantee Scheme?

Another factor that’s helped to boost the return of 95% mortgages is the government’s Mortgage Guarantee Scheme. This initiative, which launched in April 2021, enables you to purchase a property costing up to £600,000 with a deposit of just 5%.

The scheme is not limited just to first-time buyers. It’s also available for movers who have little equity in their home. The scheme works by the government offering a financial guarantee to lenders who, in turn, should be more willing to reintroduce lending at a higher LTV.

There are now a whole host of major lenders participating in the scheme, including the below:

  • Barclays

  • Halifax

  • HSBC

  • NatWest/Royal Bank of Scotland

  • Santander

  • Virgin Money

However, you’ll need to check the small print of each lender. For example, some will not lend on new-build properties or impose restrictions on lending against flats and maisonettes.

Certain lenders impose caps on maximum loan size (no more than £500,000, for example), or on the length of the mortgage term (say, not beyond 30 years).

What are my other options with a 5% deposit?

A further option if you are struggling to save a large enough deposit is the Help to Buy Equity Loan scheme. This is another government initiative which enables you to get a mortgage with just a 5% deposit. However, it is only available to those buying a new-build home.

With this scheme, the government will lend you up to 20% of the property’s value. Along with your 5% deposit, this enables you to access mortgage deals at 75% LTV which are cheaper. In London, the government will lend up to 40%. There’s no interest to pay on this government loan for the first five years.

However, as a borrower with a 5% mortgage, don’t make the mistake of assuming you can only get a mortgage via a government scheme.

More lenders – including the Nationwide, Yorkshire, Coventry and Leeds building societies – are now offering 95% home loans on the open market. And some deals may offer better value than those on offer under government initiatives.

How do you choose a 95% mortgage?

When searching for a 95% mortgage, you need to compare deals which you can do with a comparison website and online mortgage calculator.

It’s also worth speaking to a mortgage broker who can scour the market for you. This can be particularly helpful when trying to navigate the home loan market for the first time.

A broker will be able to find the deals best suited to your individual situation. They will also know how to present your case to the right lender and in the best possible light. With some brokers you don’t pay a penny as they take their fee from the lender instead.

How do you qualify for a 95% mortgage?

To qualify for a home loan with a 5% deposit, you’ll have to pass the bank or building society’s strict eligibility criteria. This will include affordability checks, and the lender looking at your credit report to see that you are credit-worthy.

When applying, you will need to provide paperwork such as bank statements, recent payslips for evidence of income, plus documents that prove your identity. For example, your passport and/or utility bills.

What are the benefits of a 95% mortgage?

The major upside of a 95% home loan is the fact you only need to save a deposit of 5% (in addition to fees such as stamp duty and conveyancing). While this is still a large amount of money, it can either make it a lot easier or just possible, to reach your savings goal.

What are the risks?

Lenders view 95% mortgages as more risky. As a result, these low-deposit mortgages cost more than home loans for borrowers who can scrape together a deposit of 10% or more.

If you do find a 95% mortgage with an appealingly-low headline mortgage rate, it may come with hefty fees which could bump up the overall cost. When doing your sums, factor in the fee by dividing it by the number of months of the mortgage (say, 24) and adding it to the repayment cost.

Taking a 95% mortgage also puts you at the mercy of house prices falling. If this happens, you could potentially find yourself in negative equity (meaning you owe more than your home is worth).

You may benefit from seeking out advice from an independent fee-free mortgage broker before making any decisions.

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