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.
During the uncertainty of the pandemic, banks became much more risk averse and many pulled their 95% mortgage deals.
But things are beginning to change with lenders, once again, offering low-deposit deals.
This will give hope to young 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.
As a borrower, you will find that 95% mortgages are now more widely available. This is largely thanks to the government’s Mortgage Guarantee Scheme. This initiative, which began in April this year, 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 existing home. The government launched this scheme in the hope that, by offering a financial guarantee to lenders, they would be willing to reintroduce lending at a higher LTV.
This plan seems to have worked as there are now a host of lenders, including Barclays, HSBC and Lloyds, all participating. Here are some of the mortgage deals that are on offer under the scheme at the time of writing (July 2021):
* Barclays Two-year fixed at 3.99% with no fee, and a five-year fix at 4.09%, also no fee
* HSBC Two-year fixed at 4.29% with no fee, or a 3.99% fix with a £999 fee. Fee-free, five-year fixes also available
* NatWest Two-year fixed at 3.9% and a five-year fix at 4.04%, both fee-free
* Virgin Money Five-year fixed at 3.99% with no fee. 10 and 15-year versions also available
With the Mortgage Guarantee Scheme, you need to check the small print. Some lenders will not lend on new-build properties. With others, lending on flats and maisonettes may come with restrictions. Certain lenders have 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).
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.
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.
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.
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.
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).
Tread carefully and seek advice before deciding to borrow at this level.