Mortgage deposit explained 95% mortgages

House of coins

Remortgaging can be tricky if you've got a 95% mortgage

Find out how 95% mortgages work, what the risks are, and how to increase your chances of getting one. 

If you're a first-time buyer a 95% mortgage is likely to appeal to you, as it means you'll only need a 5% deposit. But 95% mortgages come with risks, and lenders usually have stricter rules about who they'll offer one to.  

What is a 95% mortgage?

A 95% mortgage is a loan for 95% of the value of the property you want to buy. So, for example, if you wanted to buy a house worth £200,000 with a 95% mortgage, you'd borrow £190,000 and put in a deposit of £10,000 (5%) of your own money.

If you decide to take out a 95% mortgage, you'll usually have to pay a higher rate of interest than you would if you had a bigger deposit. This is because the risk to the lender increases with the size of the loan they give you.

As with any mortgage, you'll also need to budget for additional fees both on the mortgage itself and for extras such as stamp duty and conveyancing.

  • With so many mortgages on the market, knowing where to start can be daunting. Which? Mortgage Advisers will look at every available deal, including 95% mortgages, and give expert, impartial advice on the best one for your personal circumstances. Call them now on 0808 252 7987

Lending criteria for 95% mortgages

At the moment, lenders have quite strict criteria for 95% mortgages.

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. Ensuring that you're registered on the electoral roll is a quick and easy way of boosting your credit rating.

Sufficient income

As well as having the minimum 5% deposit required for a 95% mortgage, you need to demonstrate that you earn enough to cover the cost of the monthly repayments. As a broad rule of thumb, banks and building societies will lend you between three and four times your salary if you're a first-time buyer purchasing 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'll probably need a salary of around £48,000, or a combined salary of £76,000 for a couple - although this will vary depending on your personal circumstances.

Affordability testing

When deciding whether to give you a 95% mortgage, lenders will look at much more than your salary. They'll assess the full range of your income, regular outgoings and any debt, among other things, when working out whether you can afford a mortgage. Speak to a mortgage adviser if you want guidance on getting yourself into the best possible position before applying.

95% mortgages: risks and downsides

Interest rates

Interest rates on 95% mortgages tend to be higher than rates for smaller mortgages, meaning that you'll have to repay more every month.

With this in mind, if you have a low income and only a 5% deposit, you may find that mortgage providers are unwilling to lend to you in case you can't afford the repayments.

Remortgaging

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. 

Borrowing a high proportion on 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.

  • Understand more about the process with the Which? Mortgage Advisers guide to remortgaging

Decreasing house prices

The property market is unpredictable. If the value of your home falls, you could end up owning less than 5%, or even end up in negative equity (where you owe more than the property is actually worth).

Help to Buy 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 loan-to-value mortgage they offer.

So, how does it work? You put down a deposit of at least 5% and the government then guarantees any mortgage lending above 80% of the property's value. So if you took out a 95% mortgage the government would guarantee to repay your lender up to 15% of its value if you defaulted. 

But that all happens behind the scenes, and to you as the borrower the mortgage works in the same way as any other. 

Find out more: Help to Buy mortgage guarantee

100% mortgages

As the name suggests, a 100% mortgage will allow you to borrow the full value of the property you want to purchase without a deposit.

The only 100% mortgages currently available require a family member to either put a deposit in a savings account linked to the mortgage or to act as a guarantor.

Find out more: 100% mortgages - what deals are still available?

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Your home may be repossessed if you do not keep up repayments on your mortgage.

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