For many people in the UK today, rising house prices can mean that saving for a deposit can take a lot longer. However, for those wanting to get on the property ladder quicker, and with a lower deposit, a 95% mortgage could be 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 often used by first-time buyers, but it's available to anyone meeting the lender’s criteria.
In this article, we look at how 95% mortgages work, which lenders offer them and how to apply. This article is designed for informational purposes only and does not replace professional financial advice.
How 95% Mortgages Work
A 95% mortgage means that the prospective homeowner will only need to save a 5% deposit. This may make homeownership more accessible for those unable to save a larger deposit, depending on individual circumstances.
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 was 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.
While 95% mortgages require a smaller deposit, they may come with higher costs over the term of the loan.
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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 £200,000, this would be £10,000.
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 property 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 be sure you research the market and compare lenders who are offering these types of mortgages.
Who Offers 95% Mortgages?
You can apply for a 95% mortgage from high-street banks. They are among several lenders taking part in a mortgage scheme launched by the previous government which runs until mid-2025. The mortgage guarantee scheme is designed to increase the number of mortgage deals available to those with low deposits.
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How to Apply
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, 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
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 this type of mortgage
| Advantages | Disadvantages |
|---|---|
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.
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.
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, 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. A broker can provide peace of mind, especially to first-time buyers, and support you through the mortgage application process.
For more information on mortgage brokers read: Do You Need a Mortgage Broker?
