Find out everything you need to know about 95% mortgages and why they are making a comeback.
What is a 95% Mortgage?
A 95% mortgage is a secured loan that covers 95% of a property’s value. The homeowner needs to provide the remaining 5% deposit. They are also commonly referred to as 95% Loan-To-Value (LTV) mortgages.
95% mortgage loans benefit many first-time buyers, especially those struggling to save a deposit higher than 5%. However, the mortgages come with fewer options than those with bigger deposits, and higher interest rates.
What is the Mortgage Guarantee Scheme?
The mortgage guarantee scheme is a proposed arrangement where the government will guarantee the 95% mortgage for buyers who can raise a 5% deposit. It was declared in the Spring Budget 2021 and is set to launch in April. The Scheme was intended to urge banks to begin offering 95% home loans once more after most of the loans with such terms were removed during the pandemic.
What the mortgage guarantee scheme state is that, the government will partially compensate the banks if a homeowner defaults the mortgage.
Since the onset of the Covid-19 pandemic in March 2020, economic uncertainty, brought on from the onset of the pandemic, pushed most banks away form riskier loans. This meant most banks stopped offering low-deposit mortgages. In less than a year, after the start of the pandemic, the number of 95% mortgages available fell from 391 to only 3.
The mortgage guarantee scheme allows banks to take confidence in giving 95% mortgages once again by relieving them of some of the risk involved.
Who is Eligible to Apply?
- First-time buyers and home movers across the UK are eligible for the mortgage guarantee scheme.
- Applicants must buy the property to live in themselves. This means that the scheme does not apply to buy-to-let property owners and those looking to buy a second home.
- The loan covers homes that cost up to £600,000.
The mortgage you are applying for needs to be between 90.1% and 95% of the value of the property you intend to buy. To decide whether or not to give you a 95% mortgage, the lender will look into a couple of things such as:
1. Your Credit History
Your credit history plays a significant role in determining whether or not you qualify for the 95% mortgage loan. The lender will need to find out whether you have managed to take debt responsibility in the past. If you wish to benefit from this mortgage and you currently have a negative credit score, contact us to find out how you can improve your credit score and chances of getting a mortgage.
Additionally, you need to prove that you can afford mortgage repayments. You can achieve this by providing the lender with evidence of your income and expenditure. This includes living costs, what you spend on bills and debts such as credit cards and loans.
Try our affordability calculator as a guide to see how much you could afford.
Lenders Who Will Offer Mortgages Under the Mortgage Guarantee Scheme
The government stated that from April, banks including HSBC, NatWest, Barclays, Lloyds Bank and Santander will start to dispense the 95% deals. More lenders are expected to follow suit soon afterwards.
They will need to offer a fixed range mortgage for five years in their range. The government will also give borrowers security over their predictable repayments for a longer period.
Should I Save for a Bigger Deposit?
If you can raise a deposit higher than 5%, you might have access to cheaper mortgage deals, and the interest saved by a bigger deposit will be significant. However, it is essential to keep in mind that house prices may rise in the time it takes for you to save.
What Rates Will be Available on 95% Mortgages?
Members of the public will begin to get a clearer picture of how friendly the rates will be after banks start to launch their mortgage deals. Currently, the interest rates on 90% mortgages are around the same as they were at the start of the pandemic. Members of the public can only wait to see whether the influx of the 95% deals will have reduced interest rates for first-time buyers.
Factors to Consider When Choosing the Right 95% Mortgage
There are several options when it comes to 95% mortgages. They include the following;
For a fixed-rate mortgage, the interest rates stay the same for a certain period, making it easier for homeowners to budget their repayment. On the other hand, a tracker mortgage causes your interest rates to rise or fall, depending on the Bank of England’s base rate. Therefore, you can benefit when the rate drops, but you will have to pay a higher interest if it rises.
Interest mortgages give borrowers cheaper monthly repayments but leave them owing large lump sums, which affects the property’s value. Banks also require that borrowers have a plan to pay off the remaining debt softer the mortgage ends. They are also harder to access these days.
Repayment mortgages have higher monthly payments but allow borrowers to pay a part of the entire loan each month, and not just the interest.
Is the 95% Mortgage Applicable to Newly Built Homes?
For new-build homes, it is usually more difficult to get a 95% mortgage, however there are mortgages out there for 95% mortgages on new-build houses. If you’re interested in buying a new-build, but are unable to borrow enough, it may be worth looking into a Help to Buy equity loan, where you can take a 5% deposit with a Government loan, meaning a smaller deposit is needed.
Could the Mortgage Guarantee Scheme Affect House Prices?
There is an argument Help to Buy scheme drove up the price of houses. This is because it increased the amount of people who could buy a home without increasing the number of homes available, thus creating more competition.
Others say that it depends on the success of the Government’s other plans to increase the number of homes that are built.
However, the mortgage guarantee schemes give borrowers greater purchasing power. This could heat up the market and cause real estate prices to rise.
What to Bear in Mind
Like any other loan, it has some disadvantages, one of which is the interest rate. With a 95% mortgage, you are unlikely to access the lowest interest rates. However, your broker will compare to find a mortgage deal that suits your needs best.
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