95% mortgages

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.

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.

Tobi Owens
From the Mortgages team
9
minute read
Do you know someone who could benefit from this article?
Posted 18 JANUARY 2021

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%. So, if you want to buy a home valued at £200,000, a 95% mortgage will cover £190,000 of the cost and you’ll need to put down a 5% deposit of £10,000. 95% mortgages are also sometimes referred to as 95% LTV mortgages. LTV stands for loan to value.
 
95% mortgages are good for first-time buyers, who often struggle to save up more than a 5% deposit, but they won’t offer as much choice as those who can put down a bigger deposit. They also tend to come with higher interest rates.

Due to COVID-19, 95% mortgages are currently very difficult to find and it’s not known when they will reappear on the market. So, if you’re looking for one, you may have to wait – or focus on saving a larger deposit towards a home.

How to choose the right 95% mortgage

There are a few options to consider when you’re choosing a mortgage, including:  

Fixed rate or tracker mortgage
If you choose a fixed rate mortgage the interest rate stays the same for a set period, which can make it easier to budget. With a tracker mortgage, your interest rate will go up or down depending on the Bank of England base rate – so 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.

Interest only mortgage
An interest-only mortgage will give you cheaper monthly repayments, but leave you owing a large lump sum – the value of the property itself. They’re also potentially harder to get these days. You’ll also need to have a plan in place to pay off the money you’ve borrowed once the mortgage ends.

Repayment mortgage
Repayment mortgages are more expensive when it comes to your monthly payments. But you’ll be repaying part of the whole loan each month – not just the interest.  

Help to Buy 
There are a number of UK government schemes in place to help people get on the property ladder. These include Help to Buy equity loans and Shared Ownership, where you buy a share of the property (between 25% and 75%) and pay rent on the rest.

Should I save for a bigger deposit?

If you can save more than a 5% deposit, you’ll likely to be able to access cheaper mortgage deals. But remember, house prices could rise during the time it takes to save, which might mean you’re back where you started. 

If you’re currently renting, there are lots of ways you can start saving for a deposit:

  • Switch your energy bills
    If you can get a better deal on your tariffs, you can save the difference every month.  
  • Cut your outgoings 
    Cancel any unnecessary Direct Debits and avoid buying bits and bobs that you don’t really need. Even cutting back on your daily coffee could save you several hundred pounds a year. 
  • Open a savings account 
    If you start regularly putting money aside, you’ll find it soon adds up. But not all savings accounts are the same, so it pays to do your research.

How much can I borrow with a 95% mortgage?

This will depend on your personal circumstances. Mortgage providers could lend up to four-and-a-half times your salary, or slightly less than that if you’re basing the mortgage on two incomes.

So, for example, if you were looking to buy a home worth £250,000 and you’d saved a 5% deposit of £12,500, you’d need to be earning around £52,000 a year to get a 95% mortgage.

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, so if you’ve been turned down before, this doesn’t mean you’ll never qualify for a mortgage.

If you want to find out how much you can borrow for a 95% mortgage, check our mortgage calculator.

Can you get a 95% mortgage?

Lenders will look at a few things to decide whether to offer you a 95% mortgage, including:

Your credit history
You’ll probably need an excellent credit history to be accepted, as lenders will want to see that you’ve managed debt responsibly in the past. After all, 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 has been less than excellent, you should begin to try to improve it at least six months before you want to apply for a mortgage. It’s easy to forget that even things like paying your credit card bill a bit late can impact your credit score. So maybe set up some Direct Debits to ensure that everything is paid on time, for example.

Affordability
You’ll also have to prove you can afford the mortgage repayments by showing the provider details of your income and outgoings, including what you spend on bills and living costs, as well as any debts like loans or credit cards. 

Find out about mortgage eligibility in detail.

What are the disadvantages of a 95% mortgage?

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

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. The best mortgages are reserved for those with a 35% to 40% deposit, but even if you can save between 10% and 20% you’ll find you have a choice of more deals and better rates.

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 some lenders might charge for mortgages where the loan to value is very high, usually over 80% of the property’s value. The charge might be worked out as a percentage of the amount that’s over the lender’s limit. So if you had a 95% mortgage on a home valued at £100,000, you might pay a 5% HLC on £20,000. Alternatively, the HLC can be charged at 1.5% of the mortgage. Make sure you fully understand all the charges that go along with your mortgage so that you know you can afford to pay it.

Your home may be repossessed if you do not keep up repayments on your mortgage.

95% mortgage rates

The interest rate you can expect to pay on a 95% mortgage will depend on a variety of factors. These include how much you earn, your credit history and whether you can provide a guarantor. As a general rule, the lower the loan to value (LTV), the better interest rates you’re likely to be offered, so if you can save a bigger deposit you’re likely to get a better deal. A high LTV mortgage represents a greater risk for the lender and the rates charged reflect this.

Alternatives to 95% mortgages

There are alternatives to 95% mortgages, particularly if you’re a first-time buyer or are on a lower income. If your household earns £80,000 a year or less (£90,000 in London), you could qualify for Shared Ownership, where you buy a share of the property and the government owns the rest.  
 
If you’re 55 or over, you could qualify for Older People’s Shared Ownership. If you have a disability, Home Ownership for People with Long-Term Disabilities (HOLD) might be right for you.

Can you get a 95% mortgage on a new build home?

If you meet the lender’s criteria, there’s no reason why you couldn’t get a 95% mortgage on a new-build home. But you’ll need to prove you can afford the monthly repayments – and that you could do so even if interest rates were to rise.  
 
Sometimes it’s easier to get a mortgage for a new build. For example, with a Help to Buy: Equity Loan, the government could lend you 20% of the cost of a new-build home. If you have a 5% cash deposit, you could then borrow the remaining 75% from a mortgage lender.  
 
If you’re buying in London, you might want to look into the London Help to Buy scheme. With a 5% deposit, you can get a UK government loan for up to 40% of the purchase price of a new build. You can then borrow the remaining 55% from a commercial mortgage lender.

How has the coronavirus pandemic affected 95% mortgages?

COVID-19 hit 95% mortgages very hard as lenders have withdrawn deals available to people with smaller deposits. These deals may not reappear for some time.

At the same time, the housing market is having a mini boom with increased sales, high numbers of properties coming onto the market, rising prices and temporary cuts in stamp duty.

The situation is changing all the time, so people looking for a 95% mortgage might want to keep checking to see if new deals become available.

On the other hand, it may be best to use this time to save as hard as you can for a higher deposit.

Can my family help me get a 95% mortgage?

There are a number of ways your family could help you get a 95% mortgage. The obvious one is to lend you the money for the deposit. Of course, for many people this isn’t an option.  
 
However, a family member could step in by acting as a mortgage guarantor. That means they’ll agree to cover the repayments if you miss them for any reason. 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 the mortgage payments.

Compare 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. 

All applications are subject to status and lending criteria and are based on your individual circumstances.
Applicants must be 18+ and a UK resident.

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