Buying a house with a small deposit has become more affordable, with the average mortgage rate for 95% deals falling over the past year.
Despite the interest rate rise in November 2017, and another anticipated hike on the horizon, the average interest rate for a 95% mortgage is now lower than in June 2017.
Which? explains the trend, and rounds up the best 95% mortgage deals available.
95% mortgage rates falling
A 95% loan-to-value (LTV) mortgage allows you to buy a home with just a 5% deposit. This is an attractive option for first-time buyers scrimping and saving to get on the property ladder.
As a general rule, an increase to the base rate – like the one seen in November 2017 – would push up mortgage rates. But 95% deals seem to have bucked the trend, with the average deal now cheaper than a year ago.
From May 2018 to June 2018, the average rate for two-year 95% deals eased from 4.11% to 4.06%, according to data from Moneyfacts. In the same period, the average for five-year 95% deals fell from 4.49% to 4.43%.
This puts both types of deal below the rate from June 2017, when the average for two-year 95% mortgages was 4.18% and the average for five-year deals was 4.57%.
Moneyfacts suggests that the reason for decreasing rates is that lenders are keen to attract new customers, so are targeting the first-time-buyer market.
- Find out more: 95% mortgages
Best 95% mortgage rates
The current market offers a number of attractive fixed-rate deals for buyers with 5% deposits.
For five-year fixes, the best 95% LTV deal currently available across the UK is from AA Mortgages, at an initial rate of 3.78% for the first 61 months. With no fees and a cashback offer, buyers may find this an appealing choice.
Here are the top rates for five-year fixed-rate 95% mortgages:
If you’d prefer a shorter fixed term, the best rates for two-year deals are:
|Marsden Building Society||2.89%||5.58%||£625|
|Yorkshire Building Society||3.19%||4.75%||£495|
|Newcastle Building Society||3.4%||5.7%||£498|
Should you get a 95% mortgage?
With house prices across most of the UK having increased significantly over the past five years, many young buyers are struggling to save up enough money for a deposit.
Buying on a 95% loan-to-value ratio could allow you to get a property more quickly, with a smaller amount of savings. If prices are still rising in your area, buying sooner rather than later could help you to build up equity more quickly, before you’re priced out of the market.
After you’ve paid off some of the mortgage – and if your property grows in value – you’ll be able to remortgage to a cheaper, lower loan-to-value ratio deal.
It’s also worth considering the impact of the base rate on mortgages. While it’s remained at 0.5% since November 2017, a hike is expected in the coming months – which could boost the cost of both variable and fixed-rate products. Choosing a fixed-term deal now could lock in a low rate before a possible increase.
That said, price growth is beginning to slow in some UK markets, particularly in London.
If you take out a 95% mortgage, you’re at greater risk of slipping into negative equity if your property value falls in the first few years you own it. This could make selling your home difficult, as you’d need to repay the lender any shortfall, and you might struggle to secure a remortgage deal down the line.
You’re also likely to end up paying more over the long term than if you put down a larger deposit. Even as 95% mortgage deals become cheaper, rates remain well above those available for buyers with larger deposits.
Buying with a 90% deposit
Even saving up an extra 5% of the property price – meaning you’d take out a 90% mortgage – could reap rewards over the long term.
The best deals available for a first-time buyer on a 90% LTV are:
|2-year fixed rate||Yorkshire Building Society||1.82%||4.55%||£495|
|5-year fixed rate||First Direct||2.39%||3.3%||£490|
The 90% five-year deal is a full 1.39% cheaper than the equivalent 95% mortgage deal, which could save you thousands over the course of the mortgage term.
Depending on how quickly you’re able to put money aside, it may be sensible to spend more time saving to unlock a better rate.
Alternatives to 95% mortgages
If you’re aspiring to buy your first home but are daunted by the size of the required deposit, there are several options available to you.
- Help to Buy equity loan: under the Help to Buy scheme, you put down a 5% deposit, but then borrow a further 20% (or 40% in London) of the property price from the government. This allows you to buy with a 75% (or 55% in London) loan-to-value ratio, bringing down your payments. The government loan is interest-free for five years, but you’ll then need to repay it or pay interest.You can find out more in our guide to Help to Buy.
- Shared ownership: the shared ownership scheme allows you to buy a portion of the property (usually between 25% and 75%) from a housing association, then pay rent on the remainder. Over time, you can increase the share you own, a process known as staircasing. We explain how it works in our guide to shared ownership.
- Guarantor or offset mortgage: if your family are in a position to help, you may be able to buy without a deposit at all. A guarantor mortgage requires a property-owning family member to sign a guarantee on your mortgage, while an offset deal will require a family member to deposit a significant sum (equivalent to a deposit) into a specified savings account. Read more in our guide to family mortgages.