When the pandemic hit, mortgage providers, fearing for the economic repercussions from Covid-19, largely pulled deals where buyers needed a deposit of just 5%. Last spring, the chancellor, Rishi Sunak announced a scheme whereby the government would guarantee 95% loans. This news has encouraged some lenders to return to the market and start offering 95% mortgages again.
Under this scheme, the government guarantees a portion of the mortgage if the borrower goes into default.
Finding a mortgage can be quite tricky, especially if you have a small deposit. So in this article, we’ll cover what you need to know about the 95% mortgages and help you decide whether or not they’re an option you should consider.
Quick overview of what we’ll discuss:
What is a 95% mortgage
How does the 95% mortgage guarantee scheme work?
Who is eligible to apply?
The pros of a 95% mortgage for UK homebuyers
The cons of a 95% mortgage for UK homebuyers
Choosing the right 95% mortgage
How likely am I to get a mortgage
Are there any alternatives to a 95% mortgage?
Can I get a 95% mortgage on a new-build home?
So without any further ado, let’s dive into it!
1. What is a 95% mortgage
A 95% mortgage enables you to borrow up to 95% of the purchase price of the property you want to buy, with the remaining 5% made up of your deposit.
An arrangement such as this will sometimes be referred to as a 95% LTV mortgage, where LTV stands for ‘loan-to-value. In some instances, it is described as a 5% deposit mortgage. In other words, the mortgage loan is for 95% of the property’s market price, while you need to put a 5% deposit down
A 5% deposit could help you get on the property ladder sooner, as you’ll need to save less of a lump sum.
The lowest mortgage interest rates are reserved for borrowers with large deposits of around 40% or more, but there are competitive deals for buyers with just 5% to put down.
Just be aware that a smaller deposit does mean that your choice of mortgages will be more limited.
2. How does the 95% mortgage guarantee scheme work?
The scheme is similar to the old Help to Buy mortgage guarantee scheme, which closed to new applicants in 2017.
Under the new scheme, homebuyers taking out a mortgage should not see any practical difference in their mortgage journey.
Lenders (banks and building societies) will be encouraged to offer 95% mortgages based on the government guaranteeing outstanding loans.
It means lenders have a government guarantee in the event the borrower is unable to meet their monthly mortgage repayments. Or if house prices fall and the property is worth less than the outstanding mortgage loan – known as negative equity.
Through the scheme, the government agrees to cover these risks, which means lenders will be more open to lending to homebuyers with a small deposit.
The same affordability checks will be carried out when you apply for a mortgage and having a 5% deposit will not necessarily be enough to secure the loan – even through this scheme.
Homebuyers must prove that they can comfortably afford the monthly repayments after another essential spending has been covered. You can get an idea of how much a 95% mortgage is going to cost using our affordability calculator
3. Who is eligible to apply?
The mortgage guarantee scheme is available to first-time buyers and home movers across the UK.
You’ll need to be buying a property to live in yourself – second homes and buy-to-let properties are not permitted. Both new-build and existing properties priced up to £600,000 are eligible.
You’ll need to apply for a repayment (not interest only) mortgage and pass standard affordability checks, including a loan-to-income test and credit score assessment.
The scheme will initially run until 31 December 2022, though this will be reviewed before the end date.
4. The pros of a 95% mortgage for UK homebuyers
a. You don’t need as much of a deposit
By borrowing 95% of your property’s value through a mortgage, you’ll only need to put down 5% as a deposit.
As saving a deposit can be tough, this gives first-time buyers more of a chance to buy their own home.
For example, if you’re buying a property for £150,000 with a 95% mortgage under the guarantee scheme, you’d only need to stump up £7,500 – compared with £15,000 if you were buying with a standard 10% deposit.
b. You may be able to buy sooner
Property prices in the UK grew by 7.5% in 2020, despite the impact of the pandemic, and have been steadily on the rise since the tail end of the financial crisis in 2009.
That means if prices continue on an upward trajectory, the chance of homeownership will continue to edge away from many first-time buyers.
The introduction of the 95% mortgage guarantees scheme could mean you’re able to buy sooner, rather than being forced to wait and look on as prices increase further.
c. Interest rates are at current record lows
The Bank of England’s base interest rate remains at a record low of 0.1% at the time of writing. That means borrowing has never been more affordable for those looking to buy a property. While you’ll pay a higher interest rate on your 95% mortgage than you would on one with a lower loan-to-value, mortgage interest rates are lower now than they have been previously.
So, being able to buy sooner thanks to the introduction of the guarantee scheme could mean you’ll pay a lower interest rate now than you would in the future.
With the stamp duty ‘holiday’ still in place, too, you could also save money by buying now rather than waiting.
d. It could keep the market buoyant
With more first-time buyers able to buy thanks to the mortgage guarantee scheme, sellers who own homes within reach of first-timers could be more tempted to sell and trade up, meaning more properties coming to market and more choice.
e. You can fix your payments for five years
With interest rates at record lows due to the pandemic, there is a school of thought that suggests the only direction rates can head in is up.
So, if you’re thinking of taking out a 95% mortgage, a fixed-rate loan can provide you with peace of mind that your monthly repayments won’t change for a period of time.
The good news is, under the 95% mortgage guarantee scheme, lenders must offer at least one five-year fixed rate product to buyers.
4. The cons of a 95% mortgage for UK homebuyers
a. Potentially lower maximum loan amounts
Depending on the lender, with a 95% mortgage, you may have a ceiling on how much you can borrow, no matter how good your credit rating is and no matter how high your income.
b. Higher interest rate
Usually, the larger the loan-to-value (LTV) ratio for the mortgage, the higher the interest rate you’ll pay on the loan. That means 95% mortgages will generally come with a higher interest rate than a 90% mortgage for example. But, you have to decide if you think you’ll be able to save up for a larger deposit quicker than property prices will rise.
c. Higher lending charges
When you take out a mortgage with a small percentage deposit, you’re borrowing a large percentage of money compared to the property’s price. So, you’ll have a high loan to value (LTV), which means you may have to pay a higher lending charge (HLC).
The lender will use the HLC to take out insurance on your loan, known as mortgage indemnity guarantee (MIG). This is to protect the lender, not the borrower, in case they’re forced to repossess your home and end up selling it at a loss.
Due to the high demand for 95% mortgage borrowing, the majority of lenders are not charging these higher lending fees to make it easier for you to purchase your first home. So, it’s important to get independent mortgage advice so you can consider all the lending options available to you.
d. There’s a greater risk of negative equity
As you’d be starting off with just 5% of the value of your home, if property prices go down you may end up in negative equity. That’s when you owe more on the mortgage than the property’s worth. Of course, as you pay off your mortgage and the percentage of the property that you own increases, there should be less chance of this happening.
e. You may find it hard to remortgage
Because you’d be starting off with a low percentage of equity in your home, it may take a while for you to get your LTV down low enough to qualify for the usually more competitive rates offered from a remortgage.
5. Choosing the right 95% mortgage
When choosing a 95% mortgage, you’ll need to decide whether you want to take out a fixed-rate or variable-rate loan.
Fixed-rate mortgage
A fixed-rate mortgage usually lasts between two and five years. That means you won’t have to worry about interest rates rising and your monthly payments going up during that period. But if you want to get out of the deal before the fixed term ends, you’ll probably have to pay an early repayment charge – known as an ERC.
At the end of the mortgage term, you should look for another competitive deal. If you do nothing, you will be transferred onto your lender’s standard variable rate, which is likely to be more expensive.
Variable-rate mortgage
Lenders offer standard variable-rate (SVR) mortgages, which are usually their most expensive. In addition to cheaper fixed-rate deals (see above), you can consider a tracker mortgage, where the interest rate you pay is linked to an external benchmark, usually the Bank of England base rate.
As the base rate moves, so too does the tracker rate. The rate might be set at “base rate plus 1%”, for example, meaning it will always be 1% more than whatever the base rate is at the time.
6. How likely am I to get a 95% mortgage?
This will depend on the same criteria as most mortgages, such as passing an affordability check that looks at your income and outgoings (to see if you could afford the mortgage), current debt, and your credit record and credit score. You’re unlikely to be offered a 95% mortgage if you already own a property or have a mortgage on an existing property.
7. Can I get a mortgage with a 5% deposit?
You can get a mortgage with a 5% deposit, but 95% mortgages are not as readily available as mortgages for those with much larger deposits.
You’ll also pay a higher interest rate when taking on a 95% mortgage.
Can first-time buyers get a 95% mortgage?
For first-time buyers, a 95% mortgage is often the only way they can get on the property ladder.
Those mortgages are available for first-time buyers, but the coronavirus pandemic saw many lenders pull their 95% loans from the market – meaning there have been far fewer options for first-time buyers.
Now, though, the government has launched its mortgage guarantee scheme in a bid to encourage lenders to offer more than 95% mortgages to buyers with smaller deposits.
8. Are there any alternatives to a 95% mortgage?
There are alternatives that you could consider, such as:
A Help to Buy loan
This is designed to lend you up to 20% of the price of a newly built home in England or Wales or 15% in Scotland. So, for example, in England or Wales, you’d only need to find a 5% deposit in cash and a mortgage for 75%. What’s more, there are no loan fees on the 20% loan for the first five years that you own the property.
Shared ownership
This enables you to buy a 25%-75% stake in a property and you’d pay rent on the remaining percentage. Shared Ownership can come with a ‘Staircasing’ option to purchase the share that’s being rented up to owning 100% of the property.
A guarantor mortgage
With these, a family member such as a parent takes on some of the risks of lending with you. But consider what it may do to your relationship if anything went wrong.
9. Can I get a 95% mortgage on a new-build home?
If you meet the lender’s criteria, there’s no reason why you couldn’t get a 95% mortgage on a new-build home. But you’ll need to prove you can afford the monthly repayments. And that you could do so even if interest rates were to rise.
Sometimes it’s easier to get a mortgage for a new build. For example, with a Help to Buy: Equity Loan, the government could lend you 20% of the cost of a new-build home. If you have a 5% cash deposit, you could then borrow the remaining 75% from a mortgage lender.
If you’re buying in London, you might want to look into the London Help to Buy scheme. With a 5% deposit, you can get a UK government loan for up to 40% of the purchase price of a new build. You can then borrow the remaining 55% from a commercial mortgage lender.
The Bottom Line:
With interest rates being at the lowest levels now are the best time to secure a mortgage deal on your home. A mortgage broker such as MortgageLadder can help you find the best mortgage offer regardless of your situation. Sign up for a free account today and schedule a call with a FREE mortgage broker.