With 95% mortgages becoming widely available again, many first time buyers will be tempted to take the plunge into homeownership, as it means that they will only require a 5% deposit against the value of the property they wish to buy
That being said, 95% mortgages come with a set of risks attached, not to mention a stricter set of conditions as to who can acquire one. In this article we take a closer look at 95% mortgages and the qualifying criteria for obtaining one.
What are 95% Mortgages?
The percentage of money you need to borrow is know as the 'loan to' value. The loan to value of your required mortgage is simply determined by the amount of money you have available to put down as a deposit. For example if you have £10,000, and are looking at properties around£100,000, you can effectively put down a 10% mortgage, meaning you'll need a mortgage with a loan to value of 90% (£90,000).
Before the market crash it was possible to get 100% mortgages, meaning you didn't need a deposit to secure a property. More prudence over lending has meant that the market has taken some time to recover, but it's now possible to get mortgages with as much as a 95% loan to value. This is mainly due to the government's Help to Buy scheme, which is aimed at getting first time buyers on the property ladder. For more information specific to Help to Buy, please refer to our dedicated guides.
The downside is that you'll face a higher rate of interest on the loan, as it carries a greater risk for the lender. Essentially the rule goes; the more money you can put down as a deposit, the better rate of interest you will enjoy on your mortgage.
Lending Criteria for 95% Mortgages
To qualify for any mortgage you'll need to satisfy the lending criteria. As there is a higher risk with 95% mortgages, the criteria is slightly stricter.
First of all you'll need a good credit rating. Potential lenders will look at your history of paying bills and other commitments, as well as how encumbered you are with debts recently acquired.
Secondly you'll need to satisfy the lender that you have sufficient income to make the repayments. Generally you'll be able to borrow between three and five times your annual salary (depending on lender), which will determine to an extent what and where you can buy. Most lenders will 'stress test' your income, which will give them some indication as to how likely you might be to default under certain circumstances, - and this will in turn indicate to the lender how much you can afford to borrow.
You should expect your incomings and outgoings to be somewhat scrutinised, as in current times lenders look for greater assurances that you can actually afford the loan – rather than basing it solely on your salary.
Risks of 95% Mortgages
As you only have 5% equity in the property, your monthly repayments will be more than if you put down a larger deposit. Also as mentioned earlier, interest rates tend to be higher with 95% mortgages, which mean you'll have to repay more each month in interest than with a lower loan to value mortgage.
As you only own 5%, there is also a greater risk of ending up in negative equity if the value of your property falls for any reason.
Finally, taking out a 95% mortgage may make it more difficult to re-mortgage onto a better rate when the current deal expires. For instance – you may not have paid off enough during that period to own more than the initial 5% equity, meaning you won't qualify for a better deal.
Don't have a deposit? - take a look at 100% mortgages.