What is a 95% mortgage and how does it work?  

Since the pandemic wiped low deposit deals clear from the mortgage market it has made saving for a deposit seemingly even more impossible.  Due to uncertainty that came along with COVID-19 lenders began to see these options as high-risk, hence why majority of them were withdrawn. The average cost of a property in the UK is around £230,000, making saving up for even a 10% deposit a daunting task for many.

To help combat this, Chancellor Rishi Sunak announced during the March 2021 Budget a new mortgage guarantee scheme that will allow house hunters to borrow up to 95% of the purchase price of the property that they want to buy. This means that the buyer will only have to cover the remaining 5% in deposit form, opening up the possibility of owning a home to a wider number of people.

Are you eligible for a 95% mortgage?

Although these new lower deposit mortgages may be especially helpful with getting first-time buyers onto the property ladder, you do not have to be buying your first home to make the most of the scheme. As long as you are looking to purchase a house with a value of up to £600,000 that you intend to live in yourself there is the chance that you are eligible regardless of whether it is a new build property or not.

It is important to understand that having a 5% deposit amount does not guarantee you being accepted by a lender for the mortgage. Buyers will still be subject to affordability and credit checks.

The scheme is intended to run from April 2021 – December 2022.

What are the advantages?

The main advantage to a 5% deposit is that potential buyers do not need tens of thousands of pounds sitting around in their bank account to get on the property ladder. As buyers are not having to save up for larger deposits it lowers the risk of housing prices rising at a quicker rate than people can save.

What are the disadvantages?

Interest Rates

The larger the percentage being borrowed of a house’s value usually results in higher interest rates. This means 95% mortgages normally come with higher interest rates than lower percentage mortgages so it can mean that saving up a larger deposit may be a better option. However, it is important to identify whether you can save funds quicker than house prices are rising.

Difficulty Remortgaging

Starting with a low percentage of equity in your home means that it can take time for your loan-to-value (LTV) to reduce. This means that it can take you a while to qualify for the more competitive remortgage rates.

Negative Equity

Holding just 5% of the value of your home means that there is a high risk of ending up in negative equity if property prices go down. Negative equity is where you owe more on the mortgage than the house is worth. As you begin paying off your mortgage the likelihood of this slowly decreases, similarly putting down a larger deposit will also reduce the risk.

Lower Maximum Loan Amounts

There is a cap on how much you can borrow with a 95% mortgage for some lenders. Occasionally there can be maximum loan amount regardless of your income or credit rating which can limit the type of property you will be able to afford.

Higher Lending Charges

Having a high LTV means there is a chance you will have to pay a higher lending charge (HLC).  The lender will take out insurance on your loan known as a mortgage indemnity guarantee using the HLC. This is a contingency to protect the lender in case the house is repossessed and sold at a loss.

What other alternatives are there?

Help to Buy loan

For buying new builds there are the other option of Help to Buy equity loans. This involves putting down a deposit of a minimum of 5%, the government then loans you a further percentage of the property cost (ranging between 15% – 40% depending on the property location). Therefore you only need to take out a mortgage for the remaining value. You do not pay interest on the equity loan until after 5 years, after this point you will be paying interest until the loan is repaid.

Shared Ownership

This involves buying a 25% – 75% share in a property under shared ownership and then paying rent on the remaining proportion of the property. It is only necessary to take out a mortgage for the share of the property that you own meaning you might be able to borrow at a lower LTV and qualify for better rates.

Guarantor Mortgages

Some lenders offer guarantor mortgages which means a close family member provides their home or savings as security against the loan. In certain cases, it may be possible to borrow 100% of the property value based on the guarantor’s offering. With this option however it is important to consider the impact and potential strain on relationships.

Contact Us

Looking to find out more about the 95% mortgages available to you? Get in touch with one of our advisors by calling 01225 962456