A 95% mortgage is a loan for 95% of a property’s price. With a 95% mortgage, you’d need to provide a 5% deposit to cover the remainder. For example, if you wanted to buy a house worth £200,000 with a 95% mortgage, you’d borrow £190,000 (95% of the price) and put down £10,000 of your own money (the remaining 5%).
In 2018 95% mortgages are back in fashion. After the 2008 crash, they almost completely vanished, with only a handful being available. But there are now a wealth of deals to choose from.
As a rough guide, you are likely to pay about 1% more interest on a 95% mortgage than a 90% mortgage. It is important to note however that the rates you may be eligible for will depend on a lot of other factors. It is not just about your deposit size. What’s more, any fees charged are also important.
It is a general and perhaps obvious rule that the greater the deposit you can provide upfront, the better deal you will get. This is because it will shrink your mortgage, and win the trust of a lender. After all, saving up your 5% deposit is only half the battle. You will need to be able to prove that you earn enough to meet the monthly mortgage repayments before anyone will consider lending you a 95% mortgage.
The biggest risk of 95% mortgages is falling house prices. Only a small fall will mean that you owe the bank more than your house is worth. This is called being in negative equity. This is nothing new, and personally whilst I have heard of the threat of falling house prices for decades, I am not convinced it will ever happen. But in these difficult economic times, it must be considered.
If you have no intention of moving from your property for a long time, this is less of an issue. Even if prices fall, they will almost certainly recover their value in the long-term. But if you see your property as a stepping stone, you need to be more cautious.
In theory, you can borrow up to 5 times your salary. As a general rule, 95% mortgages are not offered on new builds or if you already own a property. So they are designed for those buying older properties who are not in a chain. If you wish to purchase a new build, the Help To Buy Scheme might be more suitable for you. also, the bigger the loan-to-value (LTV) ratio of your mortgage, the higher the interest rate is likely to be. 95% mortgages are for those where there are no other options. Often as a means of getting on the property ladder.
The first alternative option is shared ownership. With this, you buy a 25%-75% share of a property and pay rent on the remaining share. Alternatively, a Help to Buy loan could help if you’re willing to buy a new-build home, as alluded to earlier. Here, you put down a 5% deposit and the government loans you a further portion of the property price (40% in london, 20% in the rest of England and Wales, and 15% in Scotland) meaning you only need to take out a mortgage on the remaining balance. This helps ease the burden somewhat.
The final option, one that is used by many, is to seek financial help from family. This could mean a loan to help with a bigger deposit, or by acting as guarantors on a loan.