How does a 95% mortgage work?
Taking out a 95% mortgage means your mortgage provider will lend you 95% of the cost of your new home. You’ll have to pay the remaining 5% up front as a deposit.
For example, let’s say you took out a 95% mortgage on a £250,000 house. This means you’d pay a £12,500 deposit (as £12,500 is 5% of £250,000). You’d then borrow £237,500 (the remaining 95%) from your mortgage provider. After that, you’ll make monthly payments to pay off your debt, plus interest.
You may see these mortgages called ‘95% LTV mortgages’. ‘LTV’ stands for ‘loan-to-value’, and means the mortgage covers 95% of the property’s price.
Are 95% mortgages hard to get?
The pandemic made 95% mortgages a lot harder to come by. So the UK government introduced a scheme to bring more 95% mortgages into the market. This scheme will run until 31 December 2023.
What is the 95% mortgage guarantee scheme?
The mortgage guarantee scheme helps more lenders offer 95% mortgages. It works by the government partially compensating them if they lose money. (For example, if someone is unable to make their monthly mortgage payments). This reduces risk for lenders, making it easier for them to accept 5% deposits.
The scheme doesn’t help you with your mortgage payments. You’re still responsible for repaying your lender, even if they’re compensated through the scheme. Remember, missing payments will damage your credit score and may lead to fines and legal action. Your lender may repossess your home as a last resort to get their money back.
You can only get a mortgage under the scheme if:
- You’re applying as an individual, not a business
- You’re applying for a repayment mortgage (it can’t be an interest-only mortgage)
- The property will be your main home (it can’t be a buy-to-let mortgage)
- The property costs £600,000 or less
- You have a deposit of 5% to 9% of the property price
- You won’t take out additional borrowing on your mortgage for the next 7 years
What are 95% mortgage interest rates like?
A smaller deposit usually means a higher mortgage interest rate. So you can expect 95% mortgages to be some of the most expensive around.
Lenders using the government’s mortgage guarantee scheme must offer a five-year fixed rate option. With a fixed rate mortgage, your mortgage interest rate is ‘fixed’ for a certain period. This means your monthly repayments will stay the same until the fix ends.
But when your fixed rate ends, you’ll be put on the lender’s standard variable rate (SVR). This is usually more expensive and can go up or down, meaning your monthly payments may change. So it’s a good idea to look around for a new mortgage deal before your current fixed rate ends.
Remember that mortgage rates tend to drop with a bigger deposit. Every 5% can make a difference. If you can stretch to a 10% deposit, you’ll be able to access much cheaper mortgage deals.
Can you get a 95% mortgage on a new build?
If you only have a 5% deposit it’s more likely you’ll be refused a mortgage on a new-build. Lenders often worry that newly built properties won’t hold their value. This becomes a problem for the lender if they have to repossess your home because you’ve stopped making payments, as they may not get all their money back by selling it.
Are 95% mortgages only for first time buyers?
Both first time buyers and homeowners can apply for 95% mortgages (including those covered by the government-backed mortgage guarantee scheme which is available until 31 December 2023).
Is a 95% mortgage a good idea?
Getting a mortgage with a 5% deposit can be an expensive way to borrow, but you may decide the benefits outweigh the cost. It’s up to you how to determine the benefits – for example, it might be more space for your growing family or the opportunity to secure a promising property. However, you should only get a mortgage if you can comfortably afford it. Make sure you calculate your mortgage repayments and the ‘hidden’ costs of buying a home before you apply. Remember, your lender may repossess your home if you stop paying them (although this is a last resort).
What are the alternatives to 95% mortgages?
If the interest rates on a 95% mortgage are too high for you, one option is to save a bigger deposit. This can increase your chances of approval and help you get a better deal. It’s worth taking a look at your monthly budget to see if you could cut costs or boost your income to save more.
Of course, it can be hard to save – especially as the cost of living rises. But there are alternatives if you only have a small deposit. For example, you may be able to get a government loan, shared ownership or a top-up on your savings through the Help to Buy schemes. You could also consider asking someone to be your guarantor – this means they agree to pay your mortgage if you can’t, which reduces risk for the lender and improves your chances of acceptance.
How do I get a 95% mortgage?
Ready to apply for a mortgage? Make sure you’ve saved enough to cover the 5% deposit and the costs of buying a home (such as stamp duty and legal fees). You’ll need to prove you can comfortably afford the monthly payments – lenders may ask for pay slips and bank statements for example.
It’s also worth checking your credit rating and understanding how your score may affect your mortgage application. Having a solid credit score will increase your chances of qualifying for a 95% mortgage.
You may want to use a mortgage broker to help you assess your financial situation, find the right mortgage for you and navigate the application process. They know which lenders are likely to accept you and can also access deals not available to the public. Just be aware that some brokers charge a fee and may not cover the whole market.
You can also search mortgages with Experian. Searching is free and won’t affect your score.
Compare mortgages with Experian