Mortgage deposit explained 95% mortgages
Many first time buyers may be tempted to look to get a mortgage with a 95% loan to value, as they will only need a 5% deposit.
Yet, 95% mortgages can come with significant risks, as well as much stricter conditions on who can take them out.
Here, we explore the basics of 95% mortgages, including the risks involved and the criteria you need to meet in order to be approved for one.
Go further: Buying my first home - this guide covers all you need to know about getting on the property ladder
What is a 95% mortgage?
Any mortgage deal will have a percentage attached to it, which indicates how much of the value of the property you’re able to borrow. This is called the 'loan to value'.
A 95% mortgage allows you to borrow up to 95% of the value of the property you want to purchase. So, for example, on a house valued at £200,000, you could borrow £190,000 using a 95% mortgage, and would need a deposit of £10,000. Like all home buyers, you'll also have to pay additional fees, like stamp duty, arrangement fees and other mortgage-related costs.
If you decide to take out a 95% mortgage, you will face a higher rate of interest on your loan. The bigger deposit you have to put down, the better the rate on your mortgage you can achieve.
Go further: 100% mortgages - learn whether this product would be more suitable for your needs
Need a mortgage?
If you'd like to get personalised advice from an impartial expert, you can call Which? Mortgage Advisers on 0808 252 7987. Alternatively, the Which? Money Compare mortgage comparison tables let you search hundreds of deals from lenders large and small to choose a mortgage based on quality of service as well as cost and benefits.
Help to Buy and NewBuy 95% mortgages
Help to buy mortgages are part of the government-backed Help to Buy scheme and are available for loans of between 80% and 95% of a property’s value. Mortgage lenders who are participating in the scheme are able to get government-backed guarantees on every high LTV mortgage they offer.
The way it works is that you as the borrower put down a deposit of at least 5% and the government then guarantees any mortgage lending above 80% of the property's value. For example, if you took out an 85% mortgage the government would guarantee to repay your lender up to 10% of its value if you defaulted.
Go further: Help to Buy explained - find out if you're eligible for a Help to Buy mortgage
Before this in March 2012, the government also launched an initiative to help first time buyers called NewBuy. This allows you to buy newly-built homes with a deposit of at least 5% with a 95% mortgage.
The scheme is underwritten by the government and home building companies, which allows mortgage lenders to provide loans to people with lower deposits, which is traditionally riskier for lenders (see below). However, if you get into difficultly repaying your mortgage, the government's guarantee is there to cover the lender so you are still liable for the full amount.
Go further: NewBuy Scheme explained - learn more about the government's initiative.
95% mortgages - lending criteria
In the current environment, lenders have quite strict criteria.
Good credit record
You need a clean credit file, with a good record for paying bills, rent and other borrowing, like loans and credit cards, on time. You should make sure you're registered on the electoral roll.
Even if you have the minimum 5% deposit required for a 95% mortgage, you still need to have sufficient earnings to qualify for the loan. As a broad rule of thumb, banks and building societies will lend you between three and four times your salary if you're buying a property on your own, and 2.5 times your combined salary if you're buying with a partner.
So, if you want to buy a home valued at £200,000 and have the required £10,000, 5% deposit, you'd probably need a salary of around £48,000, or a combined salary of £76,000 for a couple.
In reality, few lenders use crude salary multiples to approve loans. Instead, most banks and building societies look at how affordable the loan will be for you, taking into consideration all of your income and outgoings and other debts.
95% mortgage risks
Interest rates on 95% mortgages tend to be higher that mortgages with a lower loan to value, meaning that you'll have to repay more every month.
With this in mind, if you have a low income but a 5% deposit, you may find that mortgage providers are still unwilling to lend to you, as you may not be able to afford repayments.
Taking out a 95% mortgage as a first time buyer might make it difficult for you to remortgage onto a better rate when your first deal ends. There are a number of factors that could affect you:
1) Borrowing a high proportion of a home means that by the time your 95% mortgage deal ends, you may not have built up enough equity, or paid off enough of your mortgage, to move to a better deal with a lower rate of interest.
2) Most 95% mortgage deals are available for two or three years. Even in the current low-interest rate environment, 95% mortgage deals charge around 6%. When your deal ends in two or three years, the Bank of England base rate may have risen, which means that you could be facing a much higher repayments on any new deals.
House price falls
If the value of your property falls, you could end up owning less than 5% of your property, or even end up in negative equity.
Go further: What is a mortgage? Video guide - find out what type of mortgage is best for you
Which Ltd is an Introducer Appointed Representative of Which? Financial Services Ltd, which is authorised and regulated by the Financial Conduct Authority. Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Your home may be repossessed if you do not keep up repayments on your mortgage.