A 95% mortgage may have felt like a distant memory since the 2007-2009 financial crash but, with a government scheme in place to help those looking for a 95% LTV mortgage, could we be seeing a return of these lower deposit mortgages for good?
What is a 95% mortgage?
A 95% mortgage is one in which you pay a deposit of 5% of the property’s selling price. You are then borrowing 95% from the lender. At the moment, you typically need a 10% deposit to secure a mortgage, but this is not affordable for many, especially with the rise in house prices. First-time buyers in particular are finding it hard to save up a 10% deposit to buy a property, and 95% mortgages could help them to get onto the property ladder.
What happened to 95% mortgages?
Before the financial crash in 2007, caused by deregulation in the finance industry, lenders were even offering 110% mortgages, but this changed dramatically. Since then, lenders have become much stricter when it comes to offering mortgages and require a larger deposit from borrowers as security to help to prevent the same thing from happening in the housing market again.
The government-backed 95% mortgage scheme
In April 2021, during the height of the coronavirus pandemic, it was found that 80% of private renters were saving for a house deposit. So, to show their dedication to supporting the housing sector, the government launched a 95% mortgage scheme to help those saving to buy their first home. This scheme enables first-time buyers, home movers, and previous homeowners to buy a property up to the value of £600,000 with a 5% deposit as the government will offer lenders the guarantee needed.
The scheme is available with lenders across the country until December 2022 when it will be reviewed. This is because it is not a long-term solution but a response to the fact that high loan-to-value lending is hard to find due to uncertainty caused by coronavirus. The way it works is that the government will compensate the mortgage lender for a portion of the money lost should the property be repossessed. This is guaranteed up to seven years after the start of the mortgage, as research shows that people are less likely to default after this time.
There are a few rules associated with this government scheme. For example, you can only apply for a repayment mortgage (not interest only), you cannot buy a new build property, the property you’re buying must be your only home, and you must have a deposit of between 5% and 9.99%.
Is a 95% mortgage right for you?
Something to be wary of when it comes to 95% mortgages is that, although they mean you can have a smaller deposit, they won’t necessarily be the cheapest option. This is because the higher the deposit you can put down the lower your interest rate will be, which means that interest rates on these low deposit mortgages can cost you more in the long run.
If you don’t think that you’ll be able to save up for a deposit higher than 5-9.99% of the price of your chosen property, this option is perfect for you if you can afford the repayments. As with any mortgage application, lenders will assess your affordability to ensure that you will be able to make your monthly payments. They will do this by looking at your payslips and bank statements. If they don’t believe that you’ll be able to afford to make the payments, you won’t be offered the mortgage.
Should you be hoping to secure a 95% mortgage, you should look into this before the end of 2022 as it’s unknown whether the government scheme will be extended or if lenders will start offering these again themselves once the scheme ends.
At Choice Mortgage Solutions, we offer independent mortgage advice to those looking to buy a property, and we can help you to find the right deal for you. Whether this is a 95% mortgage or an alternative option, we’ll ensure that we find something that suits your requirements. Contact us today and our expert team will be happy to help.