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% loan to value 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% loan to value mortgages.
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 typically come with higher interest rates.
How does the government 95% mortgage guarantee scheme work?
The UK government’s mortgage guarantee scheme enables prospective buyers to get a mortgage with a 5% deposit. It’s 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.
Introduced in April 2021, the scheme runs until 31 December 2023. 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.
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 to make sure you can afford your mortgage repayments, after your essential spending and outgoings have been taken into account.
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.
An interest-only mortgage will give you cheaper monthly repayments, but leave you owing a large lump sum – the amount you originally borrowed. You’ll also 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 ends.
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.
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.
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?
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, 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 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.
Affordability
You’ll 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.
How much can I borrow with a 95% mortgage?
This will depend on your personal circumstances. Mortgage providers could typically lend from four times 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 for a mortgage before, this doesn’t mean you’ll never qualify.
If you want to find out how much you can borrow for 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’ll get on the property ladder sooner – with house prices rapidly rising, waiting to build up a larger deposit could mean missing out on buying a dream home that’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.
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. Better deals are available when your deposit goes up by 5%, so if you can save 10%, 20% or higher, you’ll find you can choose from 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 that some lenders charge for mortgages where the loan to value is very high, usually 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 at 1.5% of the mortgage.
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.
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.
Our partner London & Country Mortgages Ltd (L&C)** 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.
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 here.
Frequently asked question
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 greater 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, which might cut into 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 your 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:
- Barclays
- Halifax
- Lloyds
- HSBC
- Santander
- Natwest
- Virgin Money
- Nationwide
Correct as of July 2022.
How long will 95% mortgages last?
The mortgage guarantee scheme will run until 31 December 2022. 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?
The Help to Buy equity loan scheme enables first-time buyers with a 5% deposit to buy a new-build home in England. Under the scheme, the government lends you up to 20% of the value of a new-build (up to 40% in Greater London) – up to a maximum purchase price, depending on your location.
Lenders participating in the government-backed mortgage guarantee scheme won’t offer a 95% mortgage on a new-build home.
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 miss 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 deposit - although for many people this isn’t an option.
Can I remortgage with a 95% mortgage?
You can remortgage with a 95% mortgage, but it may take a while before it’s possible. Most people look to remortgage once they’ve built up equity in their property. This will bring down their LTV, so they can shop around for a more competitive deal.
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 of your property goes down, it 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.
Can I get a 100% mortgage?
You may be able to get a 100% mortgage as a guarantor mortgage. You’ll need to find a trusted family member or friend who will guarantee to cover your mortgage repayments if you can’t pay them yourself. Guarantor mortgages typically come with tighter restrictions and a much higher interest rate. The alternative is a family deposit mortgage where a relative puts a percentage of the property’s value into a savings account. This will be used to meet repayments if you default.
