95% mortgages

What is a 95% mortgage?

A 95% mortgage enables you to borrow up to 95% of the purchase price of the property you want to buy, with the remaining 5% made up of your deposit.

An arrangement such as this will sometimes be referred to as a 95% LTV mortgage, where LTV stands for ‘loan-to-value’ ratio. In other words, the mortgage is for 95% of the property’s market price.

A 5% deposit could help you get on the property ladder sooner, as you’ll need to save less of a lump sum.

The lowest mortgage interest rates are reserved for borrowers with large deposits of around 40% or more, but there are competitive deals for buyers with just 5% to put down.

Just be aware that a smaller deposit does mean that your choice of mortgages will be more limited.

Should you continue to save for a larger deposit?

If you can put down a bigger deposit on a property you’ll find that you have a wider choice of mortgages with lower interest rates. So if you can wait, it could be worth taking the time to save up a bit more.

But if you are renting at the same time as saving up for a deposit, you may feel like you’re wasting money, and you’d prefer to get on the property ladder as soon as possible. And if house prices were to rise, you could find it takes you even longer to save up enough of a deposit.

It’s important to consider all the options before deciding whether to put down a 5% deposit and take a 95% mortgage, or whether to wait and continue to save.

Can you get a 95% mortgage?

When it comes to deciding how much they’re prepared to lend you, banks and building societies will take your income, your outgoings and your credit score into account. This will influence whether they offer you a 95% loan-to-value (LTV) mortgage, or whether the maximum LTV they’re prepared to loan you will be less.

The coronavirus pandemic affected many areas of the financial markets, including mortgages, and most lenders withdrew their high loan to value products in 2020. The picture is now more positive and many 90% and 95% loan to value deals are available again.

You can take a look at our mortgage calculator to get a good idea of how much a bank would be willing to lend you.

Government 95% mortgage guarantee scheme

In the Spring Budget 2021 the government announced a new 95% mortgage guarantee scheme. The scheme enables homebuyers to secure a mortgage with a 5% deposit, with the government underwriting 95% mortgage loans.

The scheme is available to all home buyers (not just first-time buyers) from April 2021 on properties worth up to £600,000. Major lenders including Barclays, HSBC, NatWest and Santander have agreed to participate from April, with more, including Virgin Money, likely to join soon after.

How does the 95% mortgage guarantee scheme work?

The scheme is similar to the old Help to Buy mortgage guarantee scheme, which closed to new applicants in 2017. Under the new scheme, homebuyers taking out a mortgage should not see any practical difference to their mortgage journey.

Lenders (banks and building societies) will be encouraged to offer 95% mortgages based on the government guaranteeing outstanding loans. It means lenders have a government guarantee in the event the borrower is unable to meet their monthly mortgage repayments, or if house prices fall and the property is worth less than the outstanding mortgage loan – known as negative equity. Through the scheme the government agrees to cover these risks, which means lenders will be more open to lending to homebuyers with a small deposit.

The same affordability checks will be carried out when you apply for a mortgage and having a 5% deposit will not necessarily be enough to secure the loan – even through this scheme. Homebuyers must prove that they can comfortably afford the monthly repayments after other essential spending has been covered. You can get an idea of how much a 95% mortgage is going to cost using our affordability calculator

Could the government guarantee scheme affect house prices?

Government guarantees on high loan to value mortgages is not always a good sign for the housing market. If lenders are nervous about lending to borrowers with a small deposit this is because they are concerned house prices could fall.

Although it could be a helping hand on to the property ladder for many borrowers, if the government is artificially ‘propping’ up the market, this could mean there is a risk house prices could drop once government schemes and help are withdrawn. If buyers only have a 5% deposit, or equity in their home, they are at risk of negative equity if property prices fall.

On the other hand, schemes such as this can cause property prices to rise. If more borrowers have greater purchasing power due to the government guarantee – and can buy with a 5% deposit, this could heat up the market and force prices up. This could mean many prospective buyers will remain shut out of the property market.

Choosing the right 95% mortgage

When choosing a 95% mortgage, you’ll need to decide whether you want to take out a fixed-rate or variable-rate loan.

Fixed-rate mortgage

A fixed rate mortgage usually lasts between two and five years and means you won’t have to worry about interest rates rising and your monthly payments going up during that period. But if you want to get out of the deal before the fixed term ends, you’ll probably have to pay an early repayment charge – known as an ERC.

At the end of the mortgage term, you should look for another competitive deal. If you do nothing, you will be transferred onto your lender’s standard variable rate, which is likely to be more expensive.

Variable-rate mortgage

Lenders offer standard variable-rate (SVR) mortgages, which are usually their most expensive. In addition to cheaper fixed-rate deals (see above), you can consider a tracker mortgage, where the interest rate you pay is linked to an external benchmark, usually the Bank of England base rate.

As the base rate moves, so too does the tracker rate. The rate might be set at “base rate plus 1%”, for example, meaning it will always be 1% more than whatever the base rate is at the time.

Comparing 95% mortgage quotes

You can compare 95% mortgage quotes from different providers, and you can also see your monthly mortgage payment breakdown for each deal by using MoneySuperMarket’s mortgage comparison tool.

Enter your borrowing requirements, the length of time you want to borrow for and the value of the property you’re looking to buy to see what the LTV percentage would be.

The mortgage quote results will then show you the maximum LTV each lender is prepared to offer you, and the type of mortgage available, plus any extra fees you’d need to pay. You can then see if a 95% mortgage would be right for you.

It’s important to remember that the comparison tool doesn’t take into account your financial situation or your credit history, and any LTV or interest rates you’re offered when you come to apply for a mortgage may be different.

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

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