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What is a 95% mortgage?

29th October 2020

Boris Johnson has asserted that a return of the 95 percent mortgage will help “turn generation rent into generation buy”. Given the current challenging economic conditions, it’s believed that 95% mortgages will help more first-time buyers get onto the property ladder by widening access to credit.

 

The scheme has, however, proved controversial because it risks inflating house prices and increasing the chance of a property crash. If you’re considering applying for a 95% mortgage, here’s everything you need to know. 

 

Defining 95 percent mortgages

A 95 percent mortgage is essentially referring to loan-to-value (LTV) of owning a house – 95% of the house price will be covered by a mortgage, leaving the remaining 5% to be stumped up as  a deposit. This means that a first-time buyer will only need £12,500 in savings to put down for a £250,000 house – an achievable amount for many.

 

This could put such homeowners more at risk of interest rate rises, as the repayments are high from the larger debt. Furthermore, it means that you only need a 5% fall in your house price to enter negative equity – a phenomenon where your mortgage exceeds the value of your home. The former is unlikely, however, with interest rates unlikely to rise, whilst the latter isn’t technically an issue unless the homeowner sells.

 

Because of these risks, you will likely need a very good credit history. Banks will logically be looking to mitigate this risk of larger debt by upping their eligibility criteria. However, this caution may be in your best interest too.

 

Benefits of 95 percent mortgages for first time buyers

Now we have the potential risks out the way, let’s take a look at the benefits. First and foremost, 95% mortgages allow more people to get on the property ladder, and faster. Large deposits are a huge obstacle in buying a first home.  The average deposit for a first-time buyer is 15%, which is £37,500 for a £250,000 home – simply too much for most millennials. Boris claimed there are 2 million people who can’t get a mortgage but could afford the repayments.

 

Getting on the housing ladder in this window of opportunity could reap future financial rewards too. If the deposit scheme does help spur on house prices to rise, then you may see this reflected in the value of your own home. Suddenly, your 95 percent mortgage could quickly be looking like an 85 percent mortgage, or lower.

 

Which banks offer 95 percent mortgages?

Many are asking “can you still get 95 percent mortgages?” because these schemes often come and go – but the answer is an emphatic yes!

 

Because this is a state-backed, highly politicised housing scheme, many high street banks are looking to offer the 95% mortgage. Some are resisting due to the loans being higher risk, but Nationwide, TSB, Barclays, Natwest and HSBC are among some of the banks offering 95% LTV mortgages, all with their own eligibility criteria. Alternatively, you can opt for a building society such as Monmouthshire, Leek United or Mansfield.

 

If you’re looking to secure a 95% mortgage, get in touch with IMC Financial Services. Our experienced mortgage brokers will be on hand to offer their expert advice and find the mortgage deal that suits your specific needs. 

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