95% mortgage: All you need to know

Highlights 

• A 95% mortgage refers to Loan-to-value (LTV) of owning a house, 95% of the house price will be covered by a mortgage, while 5% of the mortgage to be stumped up as a deposit.
• The government’s Mortgage Guarantee Scheme helped to boost the return of 95% mortgages.
• There are various banks participating in the government’s Mortgage Guarantee scheme like Barclays, HSBC, Santander, Halifax, NatWest/Royal Bank of Scotland and Virgin Money.

UK Prime Minister Boris Johnson has declared that a return of the 95% mortgage is again freely available that will help “turn generation rent into generation buy”. It is believed that it will help more first-time buyers get onto the property ladder by expanding access to credit. Around 95% mortgage scheme is proven controversial as it increases the chance of a property crash and risks inflating house prices.

What is a 95% mortgage?  

A 95% mortgage refers to Loan-to-value (LTV) of owning a house, while 5% of the mortgage to be stumped up as a deposit and 95% of the house price will be covered by a mortgage. That means the first-time buyers will need only £10,000 as deposit to mortgage £200,000 house.

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The Loan-to-value is a ratio of a home loan relative to a property’s value.  It means that buyers only need a 5% fall in house price where mortgage exceeds that value of home.

Return to low-deposit lending

Various financial institutions during the uncertainty of the pandemic pulled their 95% mortgage deals as they become more risk averse.  However, lenders are reintroducing low-deposit deals again, with low interest rates and a buoyant property market.

This will give hope to the buyers locked out of the housing market as they were finding it difficult to scrape together 10% or more of a property values.

Also read: Which UK lenders are offering best mortgage rates?

Mortgage Guarantee Scheme

The UK government’s Mortgage Guarantee Scheme, launched in April 2021, helped to boost the return of 95% mortgages. It allows buyers to purchase a property costing up to £600,000 with only a deposit of 5%. The scheme is available for first-time buyers and for movers with little equity in their home. The scheme gives financial guarantee to lenders who are keen to reintroduce lending at a higher LTV.

There are various banks participating in the scheme that include Barclays, HSBC, Santander, Halifax, NatWest/Royal Bank of Scotland and Virgin Money. However, buyers need to check the small print of each lender as some lenders will not impose restrictions on lending against maisonettes and flats or new –build properties. Some lenders also impose caps on maximum loan size, no more than £500,000 or on the length of the mortgage tern, no more than 30 years.    

Other options with a 5% deposit

Equity loan schemes can be other government scheme, if the buyer finding it difficult to save a large deposit. It allows buyers to get mortgage with just a 5% deposit, but it is only available to the buyer of new-build home.  The government grants buyers up to 20% of the property’s value, with 5% deposit and allow buyers to access mortgage at 75% Loan-to-value (LTV). In London, the government grants up to 40%, with no interest for the first five years.

Not only government but many lenders such as Yorkshire, Nationwide, Leeds building societies and Coventry are now providing 95% mortgage on the open market, and some of these deals may offer better value than government schemes.

Also read: 5 stocks to buy as UK banks report huge profits in Q3 2021

How to choose a 95% mortgage?  

Buyers need to compare deals to select the best 95% mortgage that they can compare from comparison website, online mortgage calculator or you talk to mortgage broker who can scour the market. The broker may help buyer to select the best suited to individual situation and help buyers to know how to present case to the right lender in best possible way. Some broker does not charge buyer anything as they take fee from the lender.

Eligibility for a 95% mortgage

The buyers need to pass the building society or bank’s strict eligibility criteria to qualify for home loan with a 5% deposit. Eligibility criteria will include credit report check to know credit worthiness and affordability checks. Buyers need to provide documents such as recent pay slips, identity proves and bank statements.

Benefits of a 95% mortgage

The major benefits of a 95% mortgage are that it enables buyers to get on the property ladder faster, with only 5% deposit as large deposits are a huge obstacle in purchasing first home. For example, the average deposit for the first-time buyer is 15%, which is £30,000 for a £200,000 home. If the scheme do not help increase house price then it may affect the value of your own house and your 95% mortgage may look like 85% mortgage or lower.

Risk associated with 95% mortgages

Lenders see 95% mortgage as more risky, which may led these mortgages to cost more than home loans for borrowers who may pull deposits to 10% or more. These schemes with low mortgage rate may come with high fees, which could increase the overall cost. When doing up sums, factor in the fee by dividing it by the number of months and adding it to the repayment cost.

If the house prices fall, 95% mortgage may put you in negative equity, which means you owe more than the worth of your house. Before making any decision it’s better to seek for advice from an independent fee-free broker.    

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