What is a 95% mortgage?
A 95% mortgage is a loan for 95% of a property’s price, meaning you need to provide a 5% deposit to cover the remainder.
For example, if you wanted to buy a house worth £200,000 with a 95% mortgage, you'd borrow £190,000 (95% of the price) and put down £10,000 of your own money (the remaining 5%).
Our mortgage deposit calculator shows how long it could take to save a deposit for a property in your area.
Interest rates on 95% mortgages
Generally speaking, the bigger the loan-to-value (LTV) ratio of your mortgage, the higher the interest rate you’ll be charged - so 95% mortgages tend to have higher interest rates than, say, 85% mortgages.
For this reason, it can sometimes be beneficial to save up a bigger deposit so you can get a cheaper mortgage deal.
On the other hand, if property prices in your area are rising rapidly, it could be a good idea to get on the property ladder sooner rather than later.
As with any mortgage, you'll also need to budget for additional fees - both on the mortgage itself and for any extras, such as stamp duty and conveyancing.
Can I get a 95% mortgage?
Saving up your 5% deposit is only half the battle – you’ll need to be able to prove that you earn enough to meet the monthly mortgage repayments before anyone will consider lending you a 95% mortgage.
If you’re a first-time buyer, you could theoretically borrow up to five times your salary if you’re purchasing a property on your own. The same applies to your combined salary if you’re buying with a partner.
For example, if you had saved a £10,000 (5%) deposit and wanted to buy a £200,000 home, you'd probably need a salary of at least £38,000 (or a combined salary of the same amount for a couple), although this will vary depending on the lender and your personal circumstances.
- Mortgage calculator: how much can I borrow?
While your salary is an important starting point, this isn’t the only factor lenders will take into account. 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. You can call Which? Mortgage Advisers for a free consultation on 0808 252 7987.
To qualify for a 95% mortgage you’ll need a high credit score, with a good history of paying bills, loans and credit cards off on time. If you’re paying rent, you can choose to incorporate this into your Experian credit history.
Making sure that you're registered on the electoral roll is a quick and easy way of boosting your credit score.
- Find out more: how to improve your credit score
It's very unusual for lenders to offer 95% mortgages on new-build homes, and you’re also unlikely to be able to get a 95% mortgage if you own another property.
What are the disadvantages of 95% mortgages?
High 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.
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.
Higher lending charges
If you take out a mortgage with a small deposit, your mortgage provider will be lending you a large amount of money in relation to the property’s price. This means your mortgage has a high loan-to-value (LTV) and so you may have to pay a ‘higher lending charge’ (HLC).
The HLC will sometimes be a percentage of the amount you borrow and your lender may use it to buy insurance, known as a mortgage indemnity guarantee (MIG).
A mortgage indemnity guarantee covers your lender if they repossess your property and end up selling it for less than the amount owed on the mortgage.
Taking out a 95% mortgage as a first-time buyer could make it difficult to remortgage to a better rate when your deal ends.
This is because it can take longer to build up enough equity to qualify for better deals.
- Find out more: Which? Mortgage Advisers' guide to remortgaging
If the value of your home falls, there’s a risk you could end up in negative equity. This is where you owe more on the property than what it’s worth.
The risk of this happening decreases with time, as you pay off more of your mortgage and build up your equity in the property.
Alternatives to 95% mortgages
A 95% mortgage is just one option if you have a small deposit.
Under shared ownership, you could buy a 25%-75% share of a property and pay rent on the remaining share.
Alternatively, a Help to Buy equity loan could help if you’re willing to buy a new-build home. Here, you put down a 5% deposit and the government loans you a further 20% (or 40% in London), meaning you only need to take out a mortgage on the remaining balance.
You may also be able to get help from your parents through a guarantor mortgage, where your family member takes on some of the risk of lending to you. This means that a mortgage provider may be willing to lend you more than they otherwise would.