95% mortgages

A 95% mortgage is a secured loan where your lender covers 95% of the cost of your new home. You then put down the other 5% as a deposit.

Let’s say you’re interested in a house on sale for £200,000. With a 95% mortgage:

1. Your mortgage provider would lend you £190,000

2. You’d then need to put down a 5% deposit of £10,000.

You might also hear 95% mortgages called 5% deposit mortgages or 95% loan-to-value (LTV) mortgages.

A 95% mortgage can be a good choice for first-time buyers who often struggle to save up more than a 5% deposit, particularly when house prices are high and rising. However, this type of mortgage usually comes with higher interest rates.

Not every bank or building society offers 95% mortgages for first-time buyers, but many high-street lenders do.

The main advantage of a 95% mortgage is that you’ll only need a 5% deposit to buy a property. This can be helpful if saving up a big lump sum is a tough task and means you could:

• Get on the property ladder sooner – if house prices are rising in your area, waiting to save more could mean home ownership stays out of reach.

• Start small, then move up – you don’t have to find your ‘forever home’ right away. A 95% mortgage can get you into a starter home now, with a plan to move somewhere bigger later.

• Build equity as you go – as you pay off your mortgage, you reduce what you owe and start building equity (and even more so if house prices rise). This means that once your current deal comes to an end, you could remortgage to a better deal.

While a 95% mortgage could be your ticket to becoming a homeowner, there are some disadvantages to be aware of.

Higher interest rate

A 95% mortgage won’t give you access to the cheapest deals on offer. The general rule of mortgages is the bigger your deposit, the better the interest rate.

Lower rates are available when your deposit goes up by 5%. So if you can stretch to a 10%, 15%, 20% or higher deposit, you’ll find you can choose from more deals and better rates.

Greater risk of negative equity

When you borrow such a big percentage of a property’s value, you run a bigger risk of slipping into negative equity. This is when your home is worth less than the size of your outstanding mortgage.

Say you buy a house for £200,000 - to pay for it, you put down a £10,000 deposit and a bank lends you the other £190,000 in a 95% mortgage.

Two years later, you’ve paid off £10,000 of your mortgage and now owe £180,000 in total. However, the value of your home has fallen to £170,000 - it’s worth less than what you owe, so you’re in negative equity.

Higher lending charge (HLC)

Some lenders charge extra fees to protect themselves when you're borrowing a high percentage of the property’s value – usually anything above 80% or 90%.

This is called a Higher Lending Charge and might be a flat percentage (e.g. 1.5%) or calculated based on how much you’re borrowing above a certain limit.

Mortgages work in different ways:

Discounted rate, fixed or tracker

With a discounted rate mortgage:

• The interest rate is set at a given percentage below the lender’s standard variable rate (SVR) and will go up or down in line with it.

• 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

• You’ll benefit if there’s a fall in the rate, but you’ll pay more if it rises.

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.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Whether you’re eligible for a mortgage will depend on your financial situation and your lender’s criteria.

As a general rule, many lenders will need you to be:

• A UK resident

• Aged over 18

• Putting down at least 5% deposit

• Buying a home worth no more than £600,000

• Getting a residential property (not a buy-to-let)

• Getting a repayment mortgage (not interest-only)

Lenders will then look at your circumstances to decide whether to offer you a 95% mortgage, including:

Your credit history

You’ll probably need a very good or excellent credit history to be accepted for a 95% mortgage. Lenders are going to cover a big chunk of the property’s value for you, so they’ll want to see that you’ve managed debt responsibly in the past.

If your credit history isn‘t as healthy as it could be, it’ll help to start working on it early. Ideally, you should give yourself at least six months to begin trying to improve your credit score before you want to apply for a mortgage.

Affordability

You’ll have to prove you can afford the mortgage repayments by showing the provider:

• Details of your income and outgoings

• Any debts, such as loans or credit cards.

This will depend on your personal circumstances. Mortgage providers typically lend from four times up to four-and-a-half times your salary, though some may offer up to five times. If you’re basing the mortgage on two incomes, it could be slightly less than that.

For example:

• You’re looking to buy a home worth £250,000

• A 5% deposit would be £12,500

• You’d need to earn around £60,000 a year to get a 95% mortgage on the remaining £237,500.

Alongside your income, lenders will also look at your outgoings and your all-important credit score.

You’ll also need to consider the other costs that you’ll have to pay when buying a property, including:

• Survey costs

• Legal fees

• Stamp duty if it’s payable

• Mortgage arrangement fees.

Mortgage providers have different criteria for accepting applicants. If you’ve been turned down for a mortgage before, this doesn’t mean you won‘t qualify next time.

If you want a rough idea of how much you might be able to borrow with a 95% mortgage, check out our mortgage calculator.

You can apply for a 95% mortgage:

• Through a mortgage broker or

• By contacting the mortgage lender directly.

Many 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.

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 L&C Mortgages Ltd** 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 L&C Mortgages Ltd

**L&C Mortgages Ltd 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 L&C 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.