95% mortgages for first-time buyers
If you’re looking or are in a position to buy your first property, it’s more than likely you will be saving up a deposit to do so. For those looking to get onto the property ladder and buy their first home or apartment, raising the funds for a deposit can often be the most difficult part of the process.
However, under the government’s mortgage guarantee scheme, having a small deposit may now suffice when applying for a mortgage. A low-deposit mortgage, such as a 95% mortgage, can give buyers an easier barrier to entry when applying for mortgages.
Since the inception of the government’s mortgage guarantee scheme, many people have taken interest in the 95% mortgage deals being offered. For example, for those who currently pay rent to a landlord, getting onto the property ladder with a small deposit makes sense. However, despite its popularity, that is not to say they are right for everyone.
At Eden Hawk Financial Solutions, we take pride in being a leading mortgage broker in South Wales. Our team of experts specialise in finding the most suitable mortgage solution catered to each person’s individual requirements and personal circumstances.
In this article, we will explain what exactly a 95% mortgage is, how they work, who is eligible and what the implications are when opting for one.
What is the 95% mortgage guarantee scheme?
The 95% mortgage guarantee scheme is a type of mortgage where the lender agrees to lend you up to 95% of the property’s value, whilst you provide a deposit of just 5%. To put it simply, you can buy a house or property with a relatively small deposit. This is also known as a 95% loan-to-value (LTV) mortgage.
Through utilising the 95% mortgage guarantee scheme, you can get access to more deals suitable to you.
The mortgage guarantee scheme, introduced in April 2021 (running until December 2023) was introduced by the government to help first-time buyers get onto the property ladder. Under the scheme, the government will cover a portion of the mortgage lender’s losses, if a homebuyer defaults on their mortgage and their property is repossessed within the first seven years after taking out the mortgage.
The 95% mortgage scheme is open to all residential homes within the UK, including older properties (up to the value of £600,000.) It does, however, exclude buy-to-let property and second homes. You do not need to be a first-time buyer to be eligible for the scheme.
95% mortgages offered through the scheme must be a repayment mortgage, as opposed to an interest-only mortgage. A repayment mortgage means you will pay both the capital that was borrowed along with any interest accrued, in a series of monthly mortgage repayments over an agreed term.
It is important to note, a 95% mortgage will come with higher interest rates. So whilst they are helpful for those looking to get on the property ladder, a smaller deposit often leads to less competitive mortgage rates and in turn, higher monthly mortgage payments.
How does a 95% mortgage actually work?
Let’s say you find a property that costs £200,000. Traditionally a mortgage lender would usually require a minimum deposit of 10% (£20,000.) Under the new mortgage guarantee scheme, you would be able to put down a deposit of 5% (£10,000) of the property’s total value.
The lender will then provide you with a mortgage loan to cover the remaining 95% of the property’s value, which is £190,000 (£200,000 minus the £10,000 deposit.)
Once the loan has been put into place, you will be required to make monthly mortgage payments to the lender, including both the principal (the amount borrowed) and the interest (the cost of borrowing the money.)
Am I eligible for any 95% mortgage deals?
Anyone who is buying a property (or remortgaging) is eligible to apply for the mortgage guarantee scheme. Whether you are approved or denied remains dependent on each individual lender’s criteria.
Firstly, you will need to make sure you have the 5% deposit of the property’s value to put down (or a 5% equity stake in your home.)
Secondly, you will need to prove to any potential lenders that you will be able to afford your mortgage deal, in the way of monthly mortgage payments.
Lenders will decide whether they see you as an appropriate candidate or not based on varying factors. Banks and building societies will take your income, outgoings and credit score into account, using these variables to calculate whether you are deemed an appropriate lendee.
When it comes to 95% mortgages you will likely need an excellent credit history to be accepted, as lenders will want to see that you have been able to manage your finances and maintain any debts responsibly in the past. Lenders will likely want to see an impeccable credit score, considering the risk they will be taking on by lending you 95% of a property’s purchase price.
If you are thinking of applying for a 95% mortgage, however, your credit history is currently less than excellent, you should aim to improve your credit score at least six months beforehand.
Lastly, in order to demonstrate your ability to meet mortgage repayments, you will need to provide the mortgage provider with evidence of your income, expenses and financial obligations. This includes disclosing your bill payments, living expenses and any outstanding debts such as loans or credit card balances.
If you are currently in the process of applying for a 95% mortgage or you are looking to do so in the near future, our team of mortgage brokers and experts at Eden Hawk Financial Solutions are here to help. We will be able to fully break down and explain mortgage eligibility as well as determine the appropriate options available, to suit your individual needs.
What are the advantages of 95% mortgage deals?
The main advantage in relation to a 95% mortgage is, of course, only needing a 5% deposit. 95% mortgages were introduced to help people get onto the property ladder sooner, as many people struggle to save up a substantial deposit. This combined with rising house prices, made buying a house for many, seem unattainable. With 95% mortgages, it gives many people the opportunity to buy their first home.
Whilst the interest rates may be higher when it comes to 95% mortgages, getting onto the property ladder can eventually lead to building up equity in your home (how much of your home you actually own.) As time progresses, as does your equity in your home, you will be able to remortgage to a better deal once your current deal comes to an end. Therefore, whilst your monthly mortgage repayments may seem high at the beginning, there is always room for adjustment in the future.
What are the disadvantages of 95% mortgage deals?
As mentioned previously, 95% mortgages will not offer competitive deals in comparison to when you put down a larger deposit. In general, the bigger the deposit, the better the interest rate. Therefore, if you have the capital to put down a larger deposit, it will likely save you more money in the long run (due to better interest rates.)
One important thing to note, when it comes to 95% mortgages, is negative equity. Negative equity is when your property is worth less than the mortgage you took out on it. By obtaining such a substantial mortgage, there is a potential risk that the property value could decline to a level below the outstanding mortgage amount. For example, if the value of your £250,000 home were to decrease by 6% to £235,000, which is greater than the value of your 5% deposit, you would find yourself in negative equity. This in turn can have knock-on effects in the future, such as selling your home or remortgaging. During a volatile market, whereby house prices are falling, buying a property with a large purchase price, using a 95% mortgage, will carry some risk.
Lastly, when the loan-to-value (LTV) ratio is high (usually over 80-90%), lenders may ask you to pay a “higher lending charge” (HLC.) The money from a HLC is used by the lender to take out an insurance policy which protects them, should you default on your mortgage. This essentially means you will be paying extra fees. It is important you fully recognise all of the potential charges that go along with your mortgage, so you know if it remains affordable or not.
Conclusion
When considering the mortgage guarantee scheme, it’s worth noting that 95% mortgages are particularly useful for first-time buyers or individuals who have difficulty saving up a larger deposit. However, it’s essential to carefully consider your financial position before taking on a mortgage, as it represents a significant financial commitment. After all, your home may be repossessed should you not keep up with your mortgage repayments.
Therefore, it’s imperative you speak with a professional mortgage advisor or broker, who can provide personalised guidance based on your circumstances. At Eden Hawk Financial Solutions, our goal is simple: to assist as many house buyers and investors as possible. Whether you are looking to buy your first property or looking to remortgage, our dedicated team of mortgage advisors will be there to guide you through the intricacies of today’s mortgage market. With the ultimate goal of helping you to plan your financial future.
If a 95% mortgage is something you may be interested in, contact us today to discuss further!