Homebuyers should be able to secure a mortgage with as little as a 5% deposit, with the government underwriting new 95% loans, thanks to new measures in the 2021 Budget.
The 95% mortgage scheme was previously suggested back in October 2020 when Boris Johnson stated he wanted to ‘turn Generation Rent into Generation Buy’ though at the time, the Prime Minister provided few details. It is now confirmed that the scheme will be available from this month (April) and is set to run until 31st December 2022, enabling homebuyers to purchase properties worth up to £600,000 with just a 5% mortgage. Both first-time buyers and existing homeowners can take advantage of it.
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What Is A 95% Mortgage?
A 95% mortgage enables you to borrow up to 95% of the purchase price of a property. The remaining 5% is made up of your deposit. This arrangement is sometimes referred to as a 95% LTV mortgage (LTV stands for ‘loan-to-value’ ratio).
Bear in mind that the lowest mortgage interest rates will still be reserved for borrowers with larger deposits of around 40% or more, but there will be competitive deals for buyers with just 5% to put down. Just be aware that a smaller deposit does mean that your choice of mortgages will be more limited. Get a re-mortgage quote here.
Can I Get A 95% Mortgage?
The coronavirus pandemic affected many areas of the financial markets, including mortgages, and most lenders withdrew their high loan to value products in 2020. However, the picture is beginning to look a lot more positive and many 90% and 95% loan to value deals are becoming available again.
The new 95% mortgage products are going to be available to both first-time buyers and home movers. However, just like with any other mortgage, you will still need to prove that you earn enough to meet the monthly mortgage repayments as well as all your other ongoing expenses. All lenders will still perform a stringent affordability check before considering lending you money.
Affordability testing Your salary is the starting point in any mortgage application, but it’s not the only factor lenders take into account. They will assess the full range of your income, outgoings and any debt, among other things, when working out whether you can afford monthly repayments. They will also ‘stress test’ your finances, making sure you could still afford the mortgage payments if interest rates were to fluctuate.
To be in with a chance of qualifying for a 95% mortgage, you must still have a good credit score. You must have a proven history of paying bills, loans and credit cards, rent on time. Registering on the electoral roll is a must and boosts your credit score.
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What Can I Borrow?
In theory, you could borrow up to five times your salary (or combined salaries) with a 95% mortgage.
For example, if you had saved a 5% deposit of £10,000 for a £200,000 home, you would usually need a salary of at least £38,000 (or a combined salary of the same amount) to be able to borrow the remaining £190,000, though the actual amount you will be able to borrow will vary depending on the lender and your personal circumstances. Some lenders place caps at 4.5 or 4.75 times your annual income.
95% Mortgage Rates And Availability
The pandemic has had a massive impact on the economy over the past year which has, up until now, made it much harder to get a 95% mortgage. In February 2021 there were only three 95% mortgage offers available, down from 273 in March 2020. However, the government’s recent announcement that they will guarantee these mortgages has prompted several major banks to launch new deals starting this month.
Buy-to-let mortgage rates vary, and like any other type of mortgage; are dependent on a number of factors. The bank will assess how risky the loan is, how much the deposit is and your credit score.
What About Mortgage Rates?
Rates on 95% mortgages are usually around 0.7%-1% which is more expensive than 90% deals so If you are able to save a bigger deposit, then you could benefit from far lower monthly repayments.
There is also a degree of uncertainty over the direction of house prices in the next few months after such a huge surge over recent months; A drop in house prices would make low deposit deals more risky, since borrowers could potentially be left in negative equity.
Which Lenders Will Offer The 95% Mortgages?
In his budget speech, Rishi Sunak said “several of the country’s largest lenders including Lloyds, Natwest, Santander, Barclays and HSBC will be offering these 95% mortgages from next month.” He also said that “more, including Virgin Money will follow shortly after.”
So some of the big names have already committed themselves but some in the industry remain sceptical about how widespread the uptake will be among lenders:
“Banks have demonstrated a reluctance to lend in this market during the past twelve months, partly due to the sheer volume of business at lower LTVs and partly due to concerns over the outlook for jobs,” said Oliver Knight, head of residential development research at Knight Frank.
“Though that outlook is improving, the success of the scheme will depend on how many lenders take it up, on top of those announced so far, and what pricing they adopt. The government will be hoping the guarantee will significantly stimulate appetite to lend in that space.”
Risks For Buyers
With the UK housing market uncertain for the coming years, there is some concern that low-deposit mortgage buyers could be at risk of falling into negative equity.
If house prices were to fall, buyers who took out a 95% LTV mortgage would be more likely to owe more than their house is worth. Negative equity makes it difficult (or impossible) to sell or re-mortgage a home, proving a risk to new buyers hoping to climb the property ladder.
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