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First-time buyers rejoice – 95% mortgages are surging

Find out the best rates and deals if you have a small house deposit

Mortgages for people with small deposits are surging at the moment, with almost 300 products to choose from – the highest number for this time of year since the 2008 financial crisis.

AA Mortgages – an offshoot of breakdown services company the AA – has recently launched two new mortgage deals for buyers with a 5% deposit, meaning that hopeful homeowners now have a choice of 288 deals in total.

If you’re looking to get on the property ladder, a mortgage with a 95% loan-to-value (LTV) ratio can help you onto the first rung. But which deal offers the best rate and what factors should you consider?

  • If you’re wondering whether a 95% LTV mortgage is right for you, our mortgage experts can give you impartial advice on your mortgage options. To chat with an expert, call Which? Mortgage Advisers on 0808 252 7987 

The return of the 95% mortgage

In June 2007, UK buyers seeking a mortgage with a 5% deposit could choose from more than 900 products, according to data from Moneyfacts.

This plummeted to just 6 in June 2009, after the financial crisis when a global stock market crash wiped millions from banks’ bottom lines. Mortgage providers tightened their lending criteria while increased regulation made it more difficult to secure credit.

Over the past decade, the number of 95% LTV mortgages on the market has steadily increased again, hitting 54 in June 2013 and then jumping to 175 the following year. Since 2015, around 123 new products have hit the market, offering hope to homebuyers with limited savings.

Find out more: 95% mortgages explained

How do 95% LTV deals measure up?

The AA’s latest deal comes with a rate of 3.99% fixed for five years and no initial fees.

However, this is not the lowest 5-year fixed rate mortgage currently available at a 95% LTV. First Trust Bank offers a five-year deal at 3.79%, also with no additional product fees.

On a two year fixed term, The AA offers 3.82% on a 95% LTV. But buyers looking for a two-year fix have plenty of cheaper rates to choose from.

The lowest offering is from Hanley Economic Building Society, with buyers paying 2.85% for the first two years of their term.

Find out more: Discount mortgages explained

Is a 95% mortgage right for you?

A 95% mortgage allows you to secure a property with a smaller amount of cash up-front, which can be a boon for first-time buyers.

If you’re relying on savings to build up a deposit, a high LTV mortgage could help you get on the property ladder quicker with smaller savings.

But interest rates tend to be higher when you put down a small deposit, because the bank is taking on more risk. Over the life of a mortgage, you may end up paying significantly more overall by buying with a 5% deposit than if your initial down payment was higher.

Lenders will also look for your income to be large enough to meet the higher interest rates. If your income is modest, you may find lenders reluctant to approve a loan on a 95% LTV.

High LTV mortgages can also be riskier for you, because you own a smaller stake in the property. If prices fall, you may find yourself owing the bank more than the property is worth.

As a first-time buyer, you need to weigh the benefits of buying a property with less cash upfront against the potential pitfalls.

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

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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