The 95% mortgage is designed to make it easier for first-time buyers to purchase a property. The mortgage guarantee scheme means that people can access a mortgage with just a 5% deposit, even though lenders usually require a deposit of 10%-15%.
Whilst 95% mortgages have always existed, they have become unpopular with lenders as they are deemed high-risk. But recently, we’ve seen a resurgence. The government scheme for 95% mortgages gives an incentive to lenders to offer these mortgages to buyers.
However, these mortgages are not cheap and so they do come with an element of risk. Read on to discover more about 95% mortgages and discover whether they are for you.
95% mortgage government scheme
The 95% mortgage scheme guarantees that if the lender loses money on the mortgage (as a result of defaulted payments or repossession), the government will take care of some of the cost. Though it’s an incentive for lenders, it does mean that for buyers, there are now more 95% mortgages available than there were in the past.
The mortgage will operate the same way as any other standard mortgage would for the buyer. This means that a 95% mortgage offered under the scheme, is no different to the consumer than it is from a 95% mortgage offered outside of the scheme.
This scheme will end in December 2022.
What does LTV mean?
LTV stands for “loan to value”. With a 5% deposit, you will receive a loan for 95% of the property’s purchase price — this is a 95% LTV mortgage.
Similarly, with a 10% deposit, you will receive a loan for 90% of the purchase price — this would be a 90% LTV mortgage.
Repayment vs interest-only mortgages
Repayment mortgages
With a repayment mortgage, you pay back the money that you have borrowed each month, as well as added interest on however much capital is left to repay. Once the mortgage term has ended, you will have paid off the loan in full.
Interest-only mortgages
If you have an interest-only mortgage, you won’t pay off your mortgage over the term of the loan — just the interest that is due. When the mortgage term ends, you will be responsible for paying off the rest of the capital, whether that’s through investments or savings.
Read our full guide on repayment vs interest-only mortgages here
Am I eligible for a 95% mortgage?
95% mortgages can be used by anybody who has a small deposit — not just first time buyers. The eligibility criteria is as such:
- -The home you are buying must be your main residence in the UK
- – The property should be worth £600,000 or less
- – New build properties are not eligible for these mortgages
- – Deposits should be for between 5-9% of the purchase price
- – It must be a repayment mortgage
- – You will have to pass your lender’s affordability criteria
A 95% mortgage does have its disadvantages
With a 95% mortgage, you are likely to have much higher rates than with a mortgage with a standard deposit. Generally speaking, bigger deposits will mean a cheaper mortgage, as you will pay back less interest.
95% mortgages are high-risk, meaning that you could end up in negative equity if your home loses value.
Applying for a mortgage
The process for applying for a mortgage is the same whether you choose a 95% LTV or a 60% LTV. We recommend speaking with a mortgage broker who can advise you on the best deals in the current market.
A mortgage broker will help you to decide on the best mortgage for you, based on your income, savings and deposit amount — whether or not that is a 95% mortgage. The broker will also be able to compare mortgage rates for you, working out whether you will be paying too much for the loan you receive.
