A 95% mortgage is a type of mortgage deal that lets you borrow 95% of the price of a property. That way, you can secure a mortgage with just a 5% deposit.
For many people, saving up enough for a mortgage deposit is the hardest part of getting onto the property ladder. That’s why the UK government has introduced a scheme to bring more low deposit mortgages back to the market.
The aim is to turn “Generation Rent” into “Generation Buy” by reducing the size of the deposit for first-time buyers to 5% – while lowering the risk for lenders at the same time.
Here, we explain all you need to know about 95% mortgages, from the mortgage guarantee scheme to the pros and cons of low deposit mortgages.
What are 95% LTV mortgages?
A 95% mortgage is a type of mortgage deal that lets you borrow 95% of the value of a property – more than you can with other deals. If you buy with a 95% mortgage, it means you’ll need a 5% deposit to make up the difference, which is why these mortgages are sometimes called 5% deposit mortgages.
You may have also seen it described as a 95% LTV mortgage. LTV is short for loan-to-value, and describes what percentage of the property’s value is covered by the mortgage. So when you buy with a 5% deposit, you get a mortgage for the remaining 95%, which makes your LTV 95%.
Generally speaking, the lower the LTV, the lower the mortgage interest rates you get access to. Which of course means that higher LTV mortgages have higher rates, meaning the monthly repayments are usually higher, too.
Are 95% mortgages still available?
Yes, 95% mortgage deals are still available – but they’re not as widely available as other types of mortgages.
That’s because lenders see them as a higher risk. By borrowing 95% of a property’s value, lenders have more to lose if the borrower defaults (can’t make repayments). That’s why higher LTV mortgages tend to have higher interest rates.
This level of risk is why lenders withdrew many of their low deposit mortgages from the market at the height of the pandemic. But now, to encourage lenders to offer 95% mortgages again, the UK government has launched a mortgage guarantee scheme.
What is the mortgage guarantee scheme?
The government launched the mortgage guarantee scheme in April 2021 to encourage more lenders to offer low deposit mortgages.
With this scheme, the government guarantees the portion of the mortgage over 80%. So let’s say you get a 95% mortgage and can’t pay it back. In that case, the government will pay the lender 15% of the mortgage back.
Some of the biggest UK lenders have committed to the scheme, including Lloyds, NatWest, Santander, Barclays, and HSBC.
Who can get a 95% mortgage through the government scheme?
When the scheme was announced, the government said it wanted to make it easier for first-time buyers to get onto the property ladder. But it’s not restricted to first-time buyers alone. Here’s the main criteria you’ll need to meet to get a 95% mortgage backed by the scheme:
- You’re buying a property under £600,000. You won’t be able to get a 5% deposit mortgage on anything worth more than this.
- You want a mortgage for 91% to 95% LTV. This means you’ll need a 5% to 9% deposit.
- You have all you need to apply for a mortgage, like a UK residency status, a solid credit score, and a steady income. Find out everything you need for a mortgage here.
- You’re buying a main residential property. Second homes or buy-to-lets don’t count.
- You meet the affordability criteria. These are the same as for other mortgages. But because a 95% mortgage means you’re borrowing more, it’s good to be sure that you can borrow enough money on your mortgage, and that your monthly income earnings will be enough to cover your monthly expenses and mortgage payments.
- You’re applying for a repayment mortgage (rather than interest only)
The scheme runs until 31 December 2022, but the government has said it’ll review this date nearer the time.
How much can I borrow on a 95% LTV mortgage?
As a rule of thumb, you can usually borrow up to 4.5 times your annual income on a mortgage. The same applies to a 95% mortgage. And if you’re buying with someone else (a partner or family member, for instance), you’ll often be able to borrow up to 4.5 times your combined annual income.
Example: If you’ve saved a 5% deposit of £12,500 on a £250,000 home, you’ll need to borrow £237,500 as a mortgage. To borrow that amount, your annual household income will usually need to be north of £52,000.
Of course, every lender is different, with some happy to lend more. To get a better idea for your own circumstances, check out how much you can borrow on a mortgage or use our mortgage calculator.
Should I get a high LTV mortgage?
When it comes to mortgages, everyone has different needs and expectations. While getting a 95% mortgage can make sense for some people, it may not be the best option for others.
Here are some things to consider before applying for a 95% LTV mortgage:
The benefits of 95% mortgages
- It could make buying a home easier. Saving a deposit can be one of the bigger obstacles to homeownership for first-time buyers. 95% mortgages make it more manageable.
- You can move sooner. With less saving required, you could get on the property ladder much quicker.
- It’s often more expensive. With high LTV mortgages, interest rates tend to be higher, meaning the mortgage will be more expensive in the long run. That’s why it’s sometimes worth saving up a bigger deposit to get a cheaper deal.
- Remortgaging might not save you as much as might expect. A possible risk of high LTV mortgages is that, even when your fixed rate period is up, you might find that the deals you’re eligible for aren’t much cheaper, and wont be until you've paid more of your mortgage off. That’s because you may not have built up enough equity (the amount of the property you own) to unlock better rates. Find out more about how remortgaging works.
Alternatives to 95% mortgages for first-time buyers
95% mortgages aren’t the only option out there for first-time buyers. There are two alternatives that may help you get a foothold on the housing ladder:
- Shared ownership schemes. This is where you buy a portion of a property and pay rent on the remaining share, usually to a developer or local housing authority. That means you only need a mortgage to cover the share that’s yours. It could help you get a better rate, by lowering the LTV. But remember, you’ll still need to be able to afford the rent on top of the mortgage repayment.
- Help to Buy Equity Loans (Wales only). If you’re looking to buy a new build home, a Help to Buy Equity Loan could help. You’ll still need a 5% deposit but, with this scheme, the government will offer you a loan of up to 20% of the value of the property. A conventional mortgage will then cover the remaining 75%. The best bit? The government’s equity loan is interest-free for the first 5 years, meaning it could be cheaper than a conventional 95% mortgage in the long run.
Different options work for different people. At Habito, we can help you find the right mortgage deal for your unique circumstances, and talk you through everything you need to know before applying. Get in touch today.