04.06.2021 | 5 minutes estimated reading time | Print this article

Everything you need to know about 95% mortgages

In 2007, there were more than 800 different 95% mortgages available for first-time buyers. This provision stopped following the financial crisis of 2008, making 5% deposit mortgages relatively scarce until 2012, when lenders started reintroducing them through various different ‘help to buy’ schemes.

While these forms of mortgages have been available throughout recent decades, the level of home ownership has dropped, mainly due to difficulties in getting onto the housing ladder in the first place, and the number of households in the private rented sector has increased from 2.8 million in 2007 to 4.5 million in 2017.

Following the impact of the coronavirus pandemic on the UK economy, Rishi Sunak announced the return of 95% mortgages in the 2021 budget on the 3rd March. Lenders began offering this type of mortgage from mid-April, in the hopes that this would spur the economy and turn ‘generation rent’ into ‘generation buy’. The scheme is planned to run until December 2022.

What is a 95% mortgage?

A 95% mortgage, also known as a 5% deposit mortgage, is a type of mortgage that enables you to borrow up to 95% of the purchase price of the property you want to buy, meaning you only have to pay a 5% deposit upfront.

While a 95% mortgage will limit your choice of lender, since only a small number of lenders offer them, they will allow you to get on the property ladder sooner, as you need less of a lump sum upfront.

Why have 5% deposit mortgages been introduced?

The 5% deposit scheme was announced as part of the 2021 budget, in order to both encourage lenders to re-enter the 95% market as well as help more first-time buyers secure a home.

In his budget speech, Chancellor Rishi Sunak said that “Every new homeowner and mover supports jobs right across the housing sector, but saving for a big enough deposit can be hard, especially for first-time buyers. By giving lenders the option of a government guarantee on 95% mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”

How do 95% mortgages work?

The scheme is similar to the former Help to Buy mortgage guarantee scheme, which closed in 2017. There is no real practical difference for homebuyers between the process of the old scheme and this one.

Lenders will be encouraged to offer 95% mortgages with the support of ‘government backing’. This means lenders have a government guarantee in the event you are unable to meet your monthly mortgage repayments, or if house prices fall and the property falls into negative equity, meaning it is worth less than the outstanding loan on it. The scheme makes lenders more inclined to offer these mortgages, because the risk is carried by the government.

Am I eligible for a 95% mortgage?

The same credit 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, as is the case with any mortgage.

Income and job stability is a huge part of applying for a mortgage, and this may become more difficult if you’ve been adversely affected by the pandemic. Homebuyers must prove that they can comfortably afford the monthly repayments after other essential spending has been covered.

To get an idea of how much you need to save for a mortgage, how much it’s going to cost you per month, how much you’ll be able to lend and whether or not you can afford it, many banks offer a free online mortgage calculator.

The advantages and disadvantages of 95% mortgages

The main, and most obvious, advantage of a 95% mortgage is that you only need a relatively small deposit while still being able to get on the property ladder and out of the renting cycle.

The flip side of this is potentially lower maximum loan amounts due to your small deposit, and higher interest rates. Higher interest rates usually occur on mortgages where the LTV, or loan-to-buy, ratio is larger.

These types of mortgages also carry a greater risk of negative equity should house prices fall and you still owe more than the property is worth, and you may find it difficult to remortgage later down the line.

However, as house prices continue to rise, they may rise faster than the rate at which you’re able to save towards a larger deposit, making a 5% deposit a better option when you look at your larger financial picture.

Which lenders offer 5% deposit mortgages?

Many of the larger lenders including Lloyds, Santander, Barclays, HSBC, Natwest, and Virgin Money are currently offering 5% deposit mortgages, along with smaller financial institutions such as Leeds Building Society, Coventry Building Society, and Yorkshire Building Society.

How to save for a house deposit

With interest rates at an all-time low, you may feel disheartened about saving for a larger deposit on a house. Despite this, you can still earn a competitive rate of interest on savings accounts like fixed rate bonds and notice accounts, so you can put away money now and enjoy a more varied selection of mortgage products later down the line.

You may also want to consider investment opportunities, although these types of financial decisions often carry more risk.

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Open a savings account with Raisin UK

Regardless of what happens to interest rates in the UK, there’s never a bad time to save. Whether it’s to take advantage of future spikes in interest rates or to protect yourself and your family from an unseen financial fallout, opening a savings account will give you more for your money.

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