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Types of mortgage

95% mortgages

By Marie Kemplay

Article 9 of 10

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95% mortgages

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

As rising prices push up the size of deposits, many first time buyers are looking to 95% mortgages to buy their first home. But buying a home with a 5% deposit come with risks, so you need to carefully evaluate whether a 95% mortgage is right for you.

  • 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.

What is a 95% mortgage?

A 95% mortgage is a loan with a loan to value ratio (LTV) of 95% - meaning you pay 5% of the property's value as a deposit and borrow the remaining cost. 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.

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 on to 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.

Find out more: 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).

  • Last updated: September 2016
  • Updated by: Marie Kemplay
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Your home may be repossessed if you do not keep up repayments on your mortgage.

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