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A short guide to 95% mortgages

With property prices and the cost of living continuing to rise, buying a home is not getting any easier. The increase in the recent stamp duty threshold will provide some relief.

Many property owners find that their mortgage costs less than renting. The main barrier to getting on the property ladder is saving enough for a deposit. Lenders vary in terms of their loan to value criteria, but in the past it has been difficult to get a mortgage with a deposit of less than 10%. The best deals are usually only available with a much lower loan to value.

However, the reintroduction of 95% mortgages could allow you to buy a home with a relatively small deposit.

How do 95% Mortgages Work?

A 95% mortgage works exactly as described. The mortgage provider will lend up to 95% of the property value, which means that you only need to find a 5% deposit. For a first time property purchase of £150,000, this requires a savings pot of £7,500. This can make saving for a home much more manageable.

What has changed with 95% mortgages?

95% (or even 100%) mortgages are not a new concept, but they became increasingly rare following the credit crunch starting in 2008.

In 2021, the government introduced a 95% mortgage guarantee scheme. The intention was to make it easier to buy a home, while offering lenders some protection from defaulting borrowers.

The main change is that if a borrower can’t repay their mortgage, the lender benefits from a government guarantee. This has resulted in more 95% mortgages becoming available, as lenders are taking on less risk.

The guarantee can be applied to mortgages on properties worth up to £600,000, which means that you could, in theory, borrow up to £570,000 under the scheme.

Who can benefit from a 95% mortgage?

You may be able to benefit from a 95% mortgage if:

  • You have good credit rating and can comfortably afford the repayments. 95% mortgages are not designed for borrowers with poor credit.
  • You are renting and the monthly repayments on a 95% mortgage would be lower than your rent.
  • You have a modest deposit saved. While the loan to value is high initially, over time, your mortgage will reduce as you make repayments. Hopefully your property will also increase in value. This means that if you move home or re-mortgage to a better deal in the future, your loan to value will be lower.
  • You are already a homeowner and you are looking to upsize. Unlike some incentives, the 95% mortgage scheme is available to all buyers. This could benefit you if you need a bigger property for a growing family, or if you need to move to a more expensive area.

What are the risks of a 95% mortgage?

There are several risks to consider when taking out a 95% mortgage:

  • The loan to value is high, which may mean that you are stretching your budget.
  • The availability of a 95% mortgage means that you can borrow more relative to the value of the property. It doesn’t increase the amount of borrowing you can take out overall.
  • If property values drop, which they are inclined to do during a recession, you could end up in negative equity. This means that if you sell the property, the proceeds won’t be enough to clear the mortgage.
  • Similarly if interest rates rise, your repayments will increase more than if you had put down a 10% or 20% deposit. It’s important to stress test your finances so that you know if you can still afford your mortgage if things change. We have lived with low interest rates for over a decade, which means many people’s idea of an affordable mortgage may not be realistic.
  • Lenders offer their best deals to borrowers with a lower loan to value. The higher your deposit, the more deals you will have access to. 95% mortgages will be relatively expensive compared to, for example, 90%, 80% or 70% mortgages, as well as incurring more risk.
  • Remember, the mortgage guarantee scheme is a benefit for the lender, not the borrower. It means that they are protected in the event of a default. If you can’t pay your mortgage, your home is still at risk of repossession. While many lenders use their membership of the scheme as an advertising point, it doesn’t mean that their product is any better than other mortgages.

Other options to consider when thinking about a 95% mortgage

If you are thinking about buying a first home or moving up the property ladder, there are a number of alternatives to the 95% mortgage:

  • First of all, consider buying a lower valued property or moving to a cheaper area if you can. This means that with the same deposit, your loan to value and your repayments will be lower. You will also be less exposed if property values drop or interest rates rise.
  • If you already own a property, consider extending or improving. You may be able to add the cost to your existing mortgage. This can be a cheaper option than upsizing, particularly when you need to account for stamp duty and moving costs.
  • The Help to Buy scheme offers first time buyers a low interest loan towards their deposit.
  • Shared ownership allows you to partially buy your home and rent the other share. Over time, you can buy the remainder.
  • In some areas, first time buyers and keyworkers can buy homes at a 30% discount.
  • If you use a Lifetime ISA to save for your deposit, you can benefit from a 25% government bonus towards your first home. If you don’t use the money for this purpose, you can withdraw it from age 60 onwards to supplement your retirement income.
  • Continue to rent. In the UK, property ownership is seen as the default option, but this is not the case in many other countries. If you live in a major city or expect to move around a lot, renting might be your best option.

Please don’t hesitate to contact a member of the team to find out more about your mortgage options.

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