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What are 95% Mortgages?

Adele MacGregor

Written by

10th Mar 2021 (Last updated on 11th May 2021) 8 minute read

For many people in the UK today, rising house prices mean that saving for a deposit can take a lot longer, making homeownership feel almost out of reach. However, for those wanting to get on the property ladder quicker, and with a lower deposit, a 95% mortgage is an option. 

A 95% mortgage is a type of mortgage that only requires a 5% deposit, meaning you will borrow 95% of the property price to purchase the home. These mortgages allow those who struggle to save a bigger deposit to get on the property ladder more quickly. This type of mortgage is especially helpful for first-time buyers but is available to anyone with good credit.

Compare My Move works with property and financial experts to give you the most up to date and relevant information when it comes to buying a home. In this article, we look at how 95% mortgages work, which lenders offer them and how to apply.  

This article will cover the following:
  1. 95% Mortgages, Coronavirus and the Mortgage Guarantee Scheme
  2. How 95% Mortgages Work
  3. Who Offers 95% Mortgages?
  4. How to Apply for a 95% Mortgage
  5. Advantages and Disadvantages of a 95% Mortgage
  6. What Are the Alternatives?
  7. Learn More About Mortgages and Deposits

95% Mortgages, Coronavirus and the Mortgage Guarantee Scheme

The Covid-19 pandemic and the subsequent lockdowns initially caused lenders to withdraw many of their mortgage products, including 95% mortgages. This especially impacted first-time buyers struggling to save for a deposit.

However, it was announced in the Budget on March 3rd that the government would be offering a guarantee for lenders to encourage them to offer 95% mortgages. This scheme is due to run from April 2021 until the end of 2022. Reputable lenders such as Natwest, HSBC, Lloyds, Santander and Barclays have always signed up. 

Under the Mortgage Guarantee Scheme, the government has said it will guarantee a portion of the mortgage over 80% - with a 95% mortgage, this would be 15%. Essentially this means that the government will partially compensate the lender if the homeowner fails to pay their mortgage. 

The scheme is designed for those who are “creditworthy” and struggling to save for a higher deposit. You do not have to be a first-time buyer. The scheme will apply for standard residential mortgages and second homes and buy-to-lets will not apply. The property must cost £600,00 or less and the mortgage will need to be on a repayment basis, not interest-only.

Lenders who are participating in the scheme will need to offer a five-year fixed-rate mortgage as part of their range, as per the terms of the scheme. This provides borrowers with the security of knowing exactly what their monthly payments will be over that time.

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How 95% Mortgages Work

A 95% mortgage means that the prospective homeowner will only need to save a 5% deposit. This means that many who were struggling to get on the property ladder can do so with a smaller deposit and in a shorter period of time.

According to Yes Homebuyers, it now takes first-time buyers on average 6.6 years to save for a mortgage deposit in the UK, with those in London taking an average of 11 years to save. The government initiative to offer more 95% mortgages has been introduced in an effort to turn “generation rent” into “generation buy”. 

A 95% mortgage is also described as having 95% LTV. This stands for “loan-to-value”, meaning the percentage of the property’s value that is covered by the mortgage supplied by your lender. 

Be aware that despite the obvious advantages to opting for a 95% mortgage, it will potentially take you longer to pay it off or mean higher monthly repayments - and you will be paying more interest to the bank.

How Much Deposit Do I Need for a 95% Mortgage?

The deposit required for a 95% mortgage is 5% of the price of the property. For example, if you are buying a property for £190,000, this would be £9,500. 

Keep in mind that you will need to save more than the deposit to cover the other costs of buying a house such as conveyancing and the cost of a survey.

What are the Interest Rates on 95% Mortgages?

As the risk to the lender increases with the size of the mortgage, 95% mortgages often come with high-interest rates. This can mean higher monthly repayments and a longer period of time to repay the mortgage in full. 

The exact interest rates will vary from lender to lender, so make sure you research the market and compare lenders who are offering these types of mortgages. 

Who Offers 95% Mortgages?

As mentioned above, many lenders withdrew their 95% mortgage products following the impact of the Coronavirus Pandemic. These types of mortgages come with a higher risk to the lender, leaving many reluctant to offer them, especially in the current economic climate.

However, the Government initiative announced in the Budget on March 3rd 2021 has meant that a number of well-known lenders will be offering 95% mortgages to their customers as of April 2021. Currently, these include Natwest, HSBC, Lloyds, Santander and Barclays, with more expected to follow. 

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How to Apply for a 95% Mortgage

Just like with any other mortgage application, you must first apply for a Mortgage Offer in Principle with a lender. This will give you an indication of how much your chosen lender is willing to loan you - and whether they are willing to offer you a mortgage with just 5% of the deposit. 

As with all mortgage applications, the lender will take into account your income, regular outgoings, if you have any debt and your credit score. This will influence whether or not they deem you a suitable candidate for a 95% mortgage. 

It is worth noting that it may be the case that upon applying for your Mortgage in Principle, that you are not eligible for a 95% mortgage. But, if your circumstances - and most importantly - your credit score improves, the lender may consider offering you a 95% mortgage when it comes to the official mortgage application. 

Advantages and Disadvantages of a 95% Mortgage

The main advantage of 95% Mortgages is that they open up the property market to those struggling to save a larger deposit. Many other mortgage products will require a minimum 10% deposit, which for those finding it a challenge to save or those on a low-wage, can often feel impossible. 

However, a 95% mortgage does come with a number of potential pitfalls and challenges, which is why it is important to understand how they work and if it is right for you. Below we’ve listed the advantages and disadvantages of opting for a 95% mortgage

AdvantagesDisadvantages

Lower deposit required

Higher interest rates

A chance to get on the property ladder quicker

It will potentially take longer to pay off

New government initiative means more lenders are open to 95% mortgages

Risk of falling into negative equity if your home decreases in value

You will need an excellent credit score 

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What Are the Alternatives?

If you are not eligible for a 95% mortgage or you feel it is not the right type of mortgage for you, there are alternatives that can help you get on the property ladder. Below we’ve listed a few different ways that can help you to become a homeowner.

Help to Buy Scheme

The Help to Buy Scheme has been extended to 2023 and is designed to get budding homeowners on the property ladder. The Help to Buy Equity Loan only requires a 5% deposit. The Equity Loan will cover another percentage of the property and you will take out a mortgage on the rest. 

Shared Ownership

Shared Ownership is a government scheme that involves buying a share of the property and paying rent on the rest, with the opportunity to buy more of the property as time goes on. This will typically be in agreement with a housing association. You will need to apply for a shared ownership mortgage, with a minimum 5% deposit. However, it's important to note that it is often difficult to sell a Shared Ownership home if you do not purchase additional shares. 

For more information see: Shared Ownership vs. Shared Equity

Guarantor Mortgage

A Guarantor Mortgage is a type of mortgage where a family member agrees to act as a “guarantor”. This means they will agree to pay your mortgage payments if you are unable to do so. Some lenders will ask for a guarantor on the mortgage if the person taking out the loan can only afford to put down a small deposit.

For more information on Guarantor Mortgages visit: Guarantor Mortgages Explained

Gifted Deposit 

Although not possible for everyone, many first-time buyers and budding homeowners are able to get on the property ladder sooner thanks to financial assistance from family members. Gifted mortgage deposits can cover part or all of the deposit for a house. Payment must not be expected in return and the gifter must not have any intention of owning the property.

For more information on the process of gifting a deposit, read: What is a Gifted Mortgage Deposit

Use a Mortgage Broker

Although it is not essential to hire a mortgage broker when applying for a mortgage, they can be highly beneficial for those looking to secure a mortgage. Mortgage brokers often have access to better or exclusive deals, many of which are not available on the wider market. They will also be able to assist you in making a strong mortgage application and help find the right lender and mortgage product for you.

For more information on mortgage brokers read: Do You Need a Mortgage Broker?

Learn More About Mortgages and Deposits

This article is part of our mortgages and deposits guide. Next in our guide we take a look at getting a mortgage if you're on a zero-hour contract. To find out more read zero-hour contract mortgages.

Disclaimer

All data, research, facts and figures have been taken from reputable sources and government data that was accurate at the time of writing. Mortgage criteria, interest rates and policies change regularly and vary depending on the lender and type of mortgage you have. You should speak directly to your mortgage lender for clarification. It should be noted that your home may be repossessed if you cannot keep up with your mortgage payments.
Adele MacGregor

Having written for PerformanceIN, WalesOnline, Grazia Magazine and The Olive Press, Adele now writes advice articles for home movers, first-time buyers and house sellers alike.