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28 Mar 2019

95% mortgage rates plummet: is now the time to apply?

Buying with a 5% deposit is becoming more affordable

If you're struggling to build up a home deposit, you may be in for a reprieve - the cost difference between 95% and 90% loan-to-value mortgages is shrinking. But is it wise to lock into a 95% mortgage deal or should you keep saving up for a larger deposit?

New data from Moneyfacts shows the gap between rates charged for two-year fixed 95% and 90% loan-to-value (LTV) mortgages is falling, and is now at its narrowest since February 2013.

Here we look at why 95% mortgages are getting cheaper and whether you should apply for a mortgage deal now while rates are low.

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The interest rate war: 95% mortgages vs 90% mortgages

The mortgage rate gap on 95% and 90% two-year fixed-rate mortgages was 0.65% in February 2019, down from 0.77% in January 2017, according to the latest Moneyfacts data.

This is both because 95% mortgages are getting cheaper and 90% mortgages are growing more expensive. The average mortgage rate for95% LTV mortgages fell by 0.95% to 3.3% from October 2017 until today, while 90% LTV mortgages rose 0.03% to 2.65% over the same period.

Generally speaking, the higher the LTV (and therefore the smaller your deposit), the higher your interest rate will be. With a minimal deposit, the lender faces a greater risk if you default on your mortgage.

The counter-trend towards cheaper 95% deals may be explained by providers trying to compete in the first-time buyer market, vying to secure more loans from these customers.

The table below shows the change between 95% and 90% LTV mortgage rates.

Max 90% LTV average rateMax 95% LTV average rateMargin attributed to risk
Jan 20192.69%3.46%0.77%
Oct 20172.62%4.19%1.57%
Feb 20134.8%5.43%0.63%

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Get a firmer grip on your finances with the expert tips in our Money newsletter – it's free weekly.

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Cheapest 95% deals available right now

The table below shows the top three cheapest initial rates available on two-year fixed-rate deals.

ProviderInitial rateRevert rateAPRC*Fees
Progressive BS1.99%5%4.61%None
Loughborough BS1.99%5.34%4.7%£999
Teachers BS2.49%5.24%5%£1,098

Source: Moneyfacts, 26 March 2019. *APRC means the average rate that would be paid over the full mortgage term.

95% mortgages pitfalls

Buying with a smaller deposit can allow you to save less and buy sooner, or leave more of your savings in your pocket. But if you're looking for a 95% mortgage, there are several factors to be aware of so you don't get caught out.

High revert rates

While some major banks offer 95% deals, the lowest mortgage rates are often available from building societies.

If you choose to borrow from a smaller building society, it's especially important toremortgageat the end of your fixed term, as building societies often have revert rates (also known asstandard variable rates) which are considerably higher than the major banks.

Loan size

Think about your loan size and how much you'll need to borrowoverall. Some of the cheapest first-time buyer mortgages have rules on the minimum or maximum loan size.

For example, some deals will only accept a maximum loan of up to £350,000 - which, with a deposit of 5%, would limit you to buying a home for £367,500 or less. While this would be an ample amount in most parts of the UK, it might not go far if you'rebuying a home in London.

The lender will also consider whether you can afford the repayments and, in most cases, may limit you to borrowing four times your income.

Maximum lending term

With house prices becoming less affordable, buyers with small deposits are increasingly opting for a 30, 35 or even40-year mortgage term. This allows you to spread out your repayments over a longer time period, bringing down your monthly payments.

While most banks offer maximum limits of 35 or 40 years, some of the smaller building societies impose maximum terms of 25 years on their first-time buyer deals.

Is it better to save up a bigger deposit?

While the gap between 90% and 95% LTV mortgages has narrowed, you're still likely to find lower rates if you save for a bit longer and build up a bigger deposit. Over the course of your mortgage, you're likely to save a substantial amount by borrowing less initially at a lower rate.

Keep in mind that owning just 5% of your property can put you at greater risk of slipping into negative equity if house prices fall, meaning you could end up owing more than the property is worth. The more deposit you put down initially, the more of a buffer you have against house price dips, especially in the early years before your repayments have shrunk your loan.

Check out our guide on how to save for a mortgage depositfor tips on building up your funds.

Alternatives to 95% mortgage

If you can't hold off on purchasing a property, there are a number of schemes available which could work as an alternative to a 95% mortgage.

Help to Buy

TheHelp to Buyscheme allows borrowers inEnglandandWalesto get a 20% equity loan from the government when buying a new-build home. InScotland,it's 15% and inLondon, it's 40%.

This means you can use a 5% deposit and get a mortgage for the remaining amount - either 55% in London, 80% in Scotland or 75% in the rest of the UK - potentially unlocking much lower rates.

While Help to Buy has been incredibly popular, some homeowners have had issues whenremortgaging with an outstanding equity loanand you will need to start paying interest on the equity loan after the first five years.

Shared ownership

Shared ownershipenables you to buy a share of a property - usually between 25% and 75% - and pay rent to a housing association on the remaining portion.

Some shared ownership schemes allow you to increase the share of the property you own at a later date through a process called 'staircasing', but this can be difficult and often costly.

Rent to Buy

Rent to Buy was introduced to help people save enough of a deposit to get onto the property ladder. The scheme allows you to rent a home at 20% below the normal market rate for up to five years.

During this time you'll get the option to either buy the entire property or purchase a portion of it through shared ownership.

The number of Rent to Buy properties available is quite limited and you may have to pass additional eligibility criteria depending on the housing association that the property is offered under.