Ten ways to maximise your mortgage chances
Here are ten top tips to help improve your likelihood of being accepted for a competitive mortgage deal.
Compare 95% mortgages from the whole market
95% mortgages enable 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. For instance, if you take out a 95% mortgage to help you buy a house that is valued at £100,000, you will end up borrowing £95,000.
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. That said, you needn’t worry – there are competitive deals for buyers with just 5% to put down too. Just be aware that a smaller deposit does mean that your choice of mortgages will be more limited.
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 may rather get on the property ladder as soon as possible. Also, 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 out a 95% mortgage. Alternatively, you could just wait and continue to accumulate a larger deposit, meaning you’re likely to benefit from more favourable interest rates. For example, to reduce your expenses and put aside more money for your deposit, you may want to consider sharing a flat or moving back with your parents for a little while.
Ultimately, what you end up opting for will depend entirely on your personal needs and circumstances.
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. In fact, most lenders in 2020 took the decision to withdraw their high loan-to-value products from the market, such as 95% mortgages. The good news, though, is that the picture is now more positive, which also means that many 90% and 95% mortgages 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. At MoneySuperMarket, we are always on a mission to help you find the best mortgage deal for your needs and pockets.
95% mortgages come with a variety of positives. If you decide to opt for this type of mortgage, you can expect to benefit from the following advantages:
There is no hiding that, at the moment, the housing market is quite uncertain. With a 95% mortgage, you will only need a relatively small deposit to secure the house you want and get yourself on the property ladder
Taking out a 95% mortgage could help you accumulate equity in your property. What’s beneficial about this is that, at the end of your mortgage term, you may have the chance to remortgage to a preferable deal and interest rate
You may find that taking out a 95% mortgage may come with cheaper monthly instalments than your rent. This is especially true if you opt for a long-term loan, which could bring down your monthly expenses
As with everything, 95% mortgages have their own set of drawbacks too. Here are some of the aspects you may want to take into account if you’re thinking about selecting this type of mortgage:
With a 95% mortgage, depending on the lender, you may only be able to borrow a limited amount of money. This is because 95% mortgages are often viewed as a high-risk type of mortgage, as providers need to lend more money and borrowers will then have to pay back a larger debt
Generally, the bigger your deposit, the better your interest rate. Since you ‘only’ need to put down 5% of deposit with a 95% mortgage, it is likely that you won’t be able to gain access to the best mortgage deals on the market. This also means that you will have to face higher interest rates
When the loan-to-value ratio is high (e.g. 80%, 90%, or more), lenders may ask you to pay a ‘higher-lending charge’ (HLC). The money from the higher-lending charge is often used by the lender to buy an insurance policy which protects them should you default on the mortgage
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% mortgages.
The scheme has been available to all home buyers (not just first-time buyers) since April 2021 on properties worth up to £600,000. Major lenders including Barclays, HSBC, NatWest, and Santander agreed to participate from April. Later on, other banks and lenders decided to follow suit, including Virgin Money.
The scheme is similar to the old Help to Buy mortgage guarantee scheme, which closed to new applicants in 2017. Under this scheme, homebuyers taking out mortgages should not see any practical difference to their mortgage journey.
Lenders, including banks and building societies, are encouraged to offer 95% mortgages based on the government guaranteeing outstanding loans. It means that lenders have a government guarantee in the event the borrower is unable to meet their monthly mortgage repayments. They are also ‘protected’ if house prices fall and the property is worth less than the outstanding mortgage loan, which is 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 this type of mortgage. Bear in mind, though, that 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 95% mortgages can cost you by using our affordability calculator.
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.
Of course, this could be a helping hand on to the property ladder for many borrowers. But if the government is artificially ‘propping’ up the market, this could mean there is a risk that 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, meaning that they can buy with a 5% deposit, this could heat up the market and force prices up.
This could also mean that many prospective buyers will remain shut out of the property market.
When choosing a 95% mortgage, you’ll need to decide whether you want to take out a fixed-rate or variable-rate loan.
A fixed-rate mortgage usually lasts between two and five years. This 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 (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.
Lenders offer standard variable-rate mortgages, which are usually their most expensive. In addition to cheaper fixed-rate deals (see above), you can consider a Tracker mortgage. In this case, the interest rate you pay is linked to an external benchmark, usually the Bank of England’s base rate.
As the base rate moves, so 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.
You can compare 95% mortgages from different providers and 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. It will also present you with the type of mortgage available, plus any extra fees you’d need to pay. With all this information at hand you can then see if 95% mortgages would be the right solution for you.
It’s important to remember that the comparison tool doesn’t take into account your financial situation or your credit history. It’s also worth mentioning that any LTV or interest rates you’re offered when you come to apply for a mortgage may end up being different.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There is no universal answer to this question, as this will depend completely on your personal situation and needs. Generally, lenders can give out up to four-and-half times your salary. But there are many different factors that they’ll want to take into consideration, including your income.
For instance, they will also want to have a look at your outgoings and check your credit score more in general. This way, they will understand whether you are a reliable borrower and decide how much money they feel comfortable lending you.
Yes, they can. But it doesn’t necessarily have to be one of your parents – any family member or close friend who is happy to act as a guarantor to help you get a 95% mortgage.
As a guarantor, they’ll be taking huge financial responsibility, as they will have to cover the costs of your debt if you can’t pay back the loan yourself. However, a guarantor mortgage can help you access better deals and interest rates. Read our page for more on guarantor mortgages.
