Finding a mortgage can be tricky, especially if you only have a small deposit. If you’re considering your options, here’s what you need to know about 95% mortgages, where you need just a 5% deposit.
What is a 95% mortgage?
A 95% mortgage is a secured loan that covers 95% of a property’s value. You’ll need to provide a deposit for the remaining 5%. For example, if you want to buy a home valued at £200,000, a 95% mortgage will cover £190,000 of the purchase price and you’ll need to put down a 5% deposit of £10,000.
95% mortgages are sometimes referred to as 5% deposit mortgages and 95% LTV mortgages. LTV stands for loan to value, which is the percentage of the mortgage in relation to the property’s value.
95% mortgages are good for first-time buyers, who often struggle to save up more than a 5% deposit as house prices have increased. But they typically come with higher interest rates.
While not all mortgage providers offer 95% mortgages for first-time buyers, most of the high-street providers offer it as an option.
How does the government 95% mortgage guarantee scheme work?
The UK government’s mortgage guarantee scheme helps protect lenders if a borrower who only has a small deposit defaults on a loan. It was designed to increase the availability of 95% loan to value mortgages at a time when very few were available, because of financial uncertainty during the covid pandemic.
Under the scheme, the government will cover a portion of the mortgage lender’s losses if a homebuyer defaults and their property is repossessed within the first seven years after the mortgage has been taken out.
The guarantee doesn’t mean that the government is guaranteeing your mortgage payments for you. You’ll be responsible for the repayments in the same way as a normal mortgage. And it doesn’t set the interest rate for your mortgage – that’s up to the lender.
The guarantee is available for all residential homes in the UK – including older properties (but not buy-to-lets or second homes) – up to the value of £600,000. And you don’t need to be a first-time buyer to qualify.
What types of mortgage does the scheme cover?
95% LTV mortgages offered under the scheme must be repayment mortgages, not interest-only mortgages, and buyers will have the option of an initial five-year fixed rate. Although ‘guarantee’ may be in the name, your 5% deposit may not be enough to secure the loan.
As with any other mortgage, you’ll need to go through – and pass – an affordability test and credit score check. This is to make sure you can afford your mortgage repayments, after your essential spending and outgoings have been taken into account.
Introduced in April 2021, the scheme runs until 31 December 2023 as 95% mortgages are now more available from lenders.
How to choose the right 95% mortgage
If you’re not buying under the mortgage guarantee scheme, you may be able to choose between a repayment mortgage and an interest-only mortgage. If you are buying through the scheme, then interest-only mortgages aren’t available.
- Repayment mortgages have more expensive monthly payments than interest-only mortgages. You’ll be repaying part of the whole loan each month – not just the interest. And by the end of the entire mortgage term the balance will be repaid in full.
- Interest-only mortgages will give you cheaper monthly repayments, but leave you still owing the amount you originally borrowed. You’ll need to show the mortgage lender that you have a satisfactory plan in place to pay off the money you’ve borrowed once the mortgage term ends.
When working out the right mortgage for you, don’t forget to take into account interest rates and any mortgage fees payable. This will help you better compare different types of mortgage, and mortgages from different providers.
Mortgages work in different ways:
Discounted rate, fixed or tracker
With a discounted rate mortgage, the interest rate is set below the lender’s standard variable rate (SVR). Typically, the discounted rate tends to be for a short introductory period of two or three years.
If you choose a fixed rate mortgage, the interest rate stays the same for a set period, which can make it easier to budget. Fixed periods are typically two, three or five years.
With a tracker mortgage, your interest rate will go up or down depending on the Bank of England base rate. This means you’ll benefit if there’s a fall in the rate but you’ll pay more if it rises.
Some lenders offer special rates for new customers, so it’s worth shopping around.
Variable rate mortgages
With a variable rate mortgage, the lender can choose to raise or lower the rate at any time.
Once your fixed, tracker or discounted rate mortgage comes to an end, you’ll normally be moved onto your mortgage lender’s standard variable rate (SVR). Lenders set their own SVR, and it’s typically based on (but above) the Bank of England base rate.
Interest rates tend to be higher on SVR mortgages, so it’s a good idea to look around for remortgage deals when your initial deal comes to an end.
Am I eligible for a 95% mortgage?
Whether you’re eligible for a mortgage will depend on your financial situation and your lender’s criteria. Lenders will look at several factors to decide whether to offer you a 95% mortgage, including:
Your credit history
You’ll probably need an excellent credit history to be accepted for a 95% mortgage, as lenders will want to see that you’ve managed debt responsibly in the past. Asking a bank or building society to lend you 95% of a property’s value could be a big risk for them.
Ideally, if your credit history is less than excellent, you should begin to try to improve your credit score at least six months before you want to apply for a mortgage. Even paying your credit card bill late can impact your credit score, so maybe set up direct debits to ensure that everything is paid on time, for example.
You’ll have to prove you can afford the mortgage repayments by showing the provider details of your income and outgoings, as well as any debts, like loans or credit cards.
Find out about mortgage eligibility in detail in our guide to increasing your chances of being approved for a mortgage.
How much can I borrow with a 95% mortgage?
This will depend on your personal circumstances. Mortgage providers typically lend from four times up to four-and-a-half times your salary. If you’re basing the mortgage on two incomes, it could be slightly less than that.
For example, if you’re looking to buy a home worth £250,000, a 5% deposit would be £12,500. You’d need to be earning around £60,000 a year to get a 95% mortgage on the remaining £237,500.
Income isn’t the only thing mortgage lenders will look at though. Your outgoings will also be taken into consideration, along with your all-important credit score.
Mortgage providers have different criteria for accepting applicants. If you’ve been turned down for a mortgage before, this doesn’t mean you’ll never qualify.
If you want to find out how much you can borrow with a 95% mortgage, check our mortgage calculator.
What are the advantages of a 95% mortgage?
The main advantage of a 95% mortgage is that you’ll only need a 5% deposit. This means:
- You could get on the property ladder sooner – if house prices are rising in your area, waiting to build up a larger deposit could mean missing out on buying a dream home as it’s no longer within your reach.
- You can start off with a small property, then move to a bigger home further down the line.
- You might start to build up equity in your home, which means that once your current deal comes to an end, you could remortgage to a better deal.
- More buyers will be able to access the housing market. If there are more buyers, then more sellers are likely to be tempted to trade up and put their homes on the market, so there’ll be more properties to choose from.
What are the disadvantages of a 95% mortgage?
While a 95% mortgage could be your ticket to becoming a homeowner, there are some disadvantages.
Higher interest rate
95% mortgages probably won’t give you access to the best deals around. The general rule of mortgages is the bigger your deposit, the better the interest rate. Lower rate deals are available when your deposit goes up by 5%, so if you can save 10%, 15%, 20% or higher, you’ll find you can choose from more deals and better rates.
Greater risk or negative equity
With such a big mortgage, you run the risk of your home’s value falling below the value of your mortgage. For example, if your £200,000 home dipped in value by 6% to £188,000 – a decrease that would be more than your 5% deposit – you’d be in negative equity. In other words, you’d owe more than your home is worth.
Higher lending charge (HLC)
This is a fee that some lenders charge for mortgages where the loan to value is very high. This fee usually kicks in when the loan is over 80-90% of the property’s value, depending on the mortgage lender’s terms. The charge might be worked out as a percentage of the amount that’s above a certain loan to value. Alternatively, the HLC can be charged as a small percentage of the mortgage, for example 1.5%.
Make sure you fully understand all the charges that go along with your mortgage, so you know you can afford to pay it.
Your home may be repossessed if you do not keep up repayments on your mortgage.
How do I apply for a 95% mortgage?
You can apply for a 95% mortgage either through a mortgage broker or by contacting the mortgage lender directly. Many of the high-street banks currently offer 95% mortgages. But it’s a good idea to compare mortgages to see what’s available rather than just asking your bank.
You’ll need to go through the same affordability and credit checks as you would with any type of new mortgage. So it’s worth getting organised and making sure you’re eligible before you start the process.
Compare 95% mortgages
When you search for mortgage deals with us, we’ll do the hard work for you. Just tell us how much the property’s worth and how much you want to borrow, and we’ll show you what’s on offer. Compare now and find a mortgage deal that suits you.
If you need help getting a 95% mortgage, we’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice.
Get in touch with one of their advisers who can give you fee-free advice to help you choose the right mortgage for you.
About London & Country Mortgages Ltd (L&C)
**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria. L&C will not charge you a broker fee should you decide to proceed with a mortgage.
Frequently asked questions
Should I save for a bigger deposit?
A bigger deposit will give you access to a wider choice of mortgages with lower interest rates. Typically, the larger the deposit you can afford to pay, the less you’ll pay in interest.
On the other hand, house prices could rise during the time it takes to save up a bigger deposit. These increases might negate any savings you can make on lower interest rates. And if you’ll be continuing to pay rent while you save, you may prefer to put that money into your own home instead.
You’ll need to weigh up all your options before you make a decision.
Which banks offer 95% mortgages?
Thanks to the mortgage guarantee scheme, many of the UK’s leading banks are now offering 95% fixed rate mortgages to eligible buyers. These include:
- Virgin Money
Correct as of July 2023.
How long will 95% mortgages last?
The government’s mortgage guarantee scheme runs until 31 December 2023. But more lenders are starting to offer 95% deals on the open market and may continue to do so after the scheme has ended.
Can you get a 95% mortgage on a new-build home?
Yes, some lenders are offering 95% mortgages on new-build houses. Mortgages backed by the mortgage guarantee scheme can also be used to buy new builds.
What is the Deposit Unlock scheme?
There is also a scheme run by the building industry called Deposit Unlocked, which makes it easier for lenders to offer 95% mortgages on new homes.
It offers participating mortgage lenders protection on their mortgages, so that they can lend at 95% on new-build housing.
To take part in the scheme:
- Find a participating developer
- Find a home you want to buy
- Talk to the developer to confirm that the chosen property is available under the Deposit Unlock scheme.
Can my family help me get a 95% mortgage?
A family member could act as a guarantor to help you get a 95% mortgage. That means they’ll agree to cover the repayments if you can’t make them.
Having a mortgage guarantor can help you access better interest rates, but there are certain conditions. For example, your guarantor must own their home outright or, at least, have plenty of equity in it. They must also earn enough to cover your mortgage payments, as well as any of their own.
Alternatively, your family could lend you the money for the minimum mortgage deposit – although for many people this isn’t an option.
Can I remortgage with a 95% mortgage?
It’s possible to remortgage onto a 95% mortgage deal provided your finances are in good shape. But it’s a good idea to talk to a mortgage broker as your choice of lenders is likely to be limited.
If you already have a 95% mortgage and are looking to remortgage to a better deal, it may take a while before it’s possible.
If the value of your property goes up significantly, then it might be worth moving to a new mortgage with a lower LTV once your current deal ends. But if the value goes down, your property will likely be worth less than the mortgage you have on it. In this case, you might not be able to remortgage and you’ll move on to your lender’s standard variable rate (SVR) when your current deal comes to an end.
What is LTV?
LTV stands for loan to valu,e which is the percentage of the mortgage in relation to the property’s value. So if your property is worth £260,000 and your deposit is £13,000, your loan to value would be 95%.
What is stamp duty?
Stamp Duty Land Tax (SDLT) is a tax paid when you buy property over a certain value in England and Northern Ireland. In Scotland it’s called the Land and Buildings Transaction Tax, and in Wales it’s called Land Transaction Tax with rates set locally.
A number of factors can affect the amount of stamp duty you’ll need to pay, including:
- Where the property is situated
- The price you pay for the property
- If you’re a first-time buyer
- Whether you already own another property.
To work out how much you’ll need to pay, use our stamp duty calculator.
Is shared ownership a good alternative to 95% mortgages?
With shared ownership, you buy a share of the home and pay rent on the rest – so monthly payments could potentially be higher than buying outright. But it can be a useful way to get on the property ladder as the mortgage you need is calculated on the share you’re buying, not the full market value of the property.
You’ll need to do the sums to be sure shared ownership adds up for you. You’ll also need to be eligible. In some shared ownership developments, preference is given to applicants who already live or work in the area. There may also be less choice about the property available to buy.
Can I get a 100% mortgage?
Skipton Building Society has a 100% Track Record mortgage. It’s available to renters who can show that they’ve paid their rent in full and on time for 12 months in a row, in the past 18 months. Applicants will need to show they haven’t missed payments on debts or credit commitments in the past six months.
The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.