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95% LTV mortgages – How do they work?

by | Jan 4, 2023

Home $ How to buy a property $ A Guide On House Mortgages $ 95% LTV mortgages – How do they work?

A 95% mortgage, also known as a 95% loan-to-value (LTV) mortgage, is a mortgage to purchase a property with a small deposit (at least 5% but less than 10% deposit of the purchase price).

What is the difference between 91-95% LTV mortgages

The range of mortgages between 91% up to 95% are all eligible for the mortgage guarantee scheme.  This is why 95% mortgages are talked about as a term as the 95% threshold is the minimum amount of loan to value you must have in order to qualify for the scheme.

On the lower end, 91% also qualifies.

For example, and using easy numbers to keep things simple, if you were buying a house valued at £100,000 and you had a deposit worth 9%, then you would still be able to qualify and take out a £91,000 loan.

What is the mortgage guarantee scheme?

The government’s mortgage guarantee scheme allows us to provide mortgages at 95% loan-to-value for first-time buyers and home movers, given they have a deposit between 5% and 9.99%.

The scheme applies to properties that will serve as the borrower’s primary residence, and applications must be submitted by December 31st, 2023.

The scheme was originally subject to end sooner than this but because of the evident success in the government back scheme, it was extended to the end of 2023.

95 number representing 95% mortgages

Who is eligible to apply?

The government’s mortgage guarantee scheme enables individuals to obtain a 95% loan-to-value mortgage with a minimum deposit of 5% of the property purchase price.

No matter if you are a first-time home buyer or an existing homeowner looking to move. 

There are no application fees, and the scheme is available for primary residence only, for single or joint mortgages, repayment mortgages without any interest-only portions.

However, the scheme is not available for new-build properties, second homes or buy-to-let properties, or commercial and interest-only mortgages.

Mortgage guarantee scheme alternatives

If you don’t want to take part in the mortgage guarantee scheme, there are a series of other government benefits to be aware of for first time buyers. They may include:

  • The help to buy scheme
  • Stamp duty havens for first time buyers
  • Lifetime Individual Savings account (LISA)
  • Shared Ownership schemes

The help to buy scheme is an interesting scheme because it is similar but different to the mortgage guarantee scheme.

Help to buy loans are loans that are given out by the government with the intention of getting buyers on the property ladder with help to buy properties whereas the mortgage guarantee schemes are there so homeowners can secure a mortgage.

If none of these appeal, you can always look at getting on the property ladder in other ways such as buying a property through auction or by buying a house with no money.

Am I eligible to apply for a 95% mortgage?

The government’s mortgage guarantee scheme allows individuals to obtain a 95% loan-to-value mortgage when buying a home (or remortgaging), provided they meet the lender’s criteria.

To qualify, borrowers must have a minimum deposit of 5% of the property’s value (or 5% equity stake in their current home) and demonstrate the ability to afford the mortgage repayments. 

This type of mortgage is often sought by first-time buyers, as rising property prices can make it challenging to save for a larger deposit and cover other home buying expenses.

Similarly, home movers might also opt for a 95% mortgage if they have limited equity in their current property or are looking to move to a more expensive property.

If it turns out you aren’t eligible for a 95% mortgage, then you can benefit from schemes like the help to buy registered developers list.  And find out what else can be done to help first time buyers.

Standard 95% mortgages

Some types of lenders are able to offer a 95% mortgage as a product. However, like most mortgage criterias, there are a range of criteria that differ depending on the lender in question.

Either way, criteria is generally strict because of the large amount of debt that a buyer takes on. This means it is unlikely you will be able to gain approval for the mortgage without proof of payslips.

The main objective with standard house mortgages is showing the lender that you’re able to afford the loan amount and any interest rate changes won’t bankrupt you as a house buyer.

You will also need a mandatory 5% deposit in this case too.

Help to Buy equity loan (Only available in Wales)

In Wales, The help to buy equity loan is a type of shared scheme that ends in March 2023. It was available to applicants in England but this loan expired in this region even sooner in October 2021.

With just 5% down, the people of Wales can take out a loan with just 1.75% interest for five years. In addition to this, if the price of the property bought has gone up over time.

This means you may be able to increase the value of the mortgage and remortgage the property and use the additional equity to pay off the government loan.

welsh help to buy equity loan

Nonetheless, the help to buy equity loans in Wales still has its downsides.

First of all, if you sell the property to a new buyer before the loan is paid off, you’d have to still pay the loan using some of the money from the property’s sale.

This is because the loan cannot be transferred to the new buyer as it is subject to the individual who took it out.

Also, there is a cap to where this relief applies and there is a cut off of £250,000. Anything with a value above this number does not qualify for the loan and you would have to take out a regular mortgage.

How to choose the right 95% mortgage

With all of these options out there, what is the right path to go down when choosing a mortgage? The first thing you should decide on is if you should take on an interest only mortgage or if you should pay back the equity of the loan.

If you need to pay back through interest only, perhaps if you’re wanting to take part in a buy to let investment for instance, this means you cannot go ahead with the mortgage guarantee scheme.

To help you decide, we firstly recommend using the buy to let mortgage article on our website as a guide but for some quick pointers, a buy to let interest only mortgage will be paid off using the interest and then at the end of the mortgage term, the equity left in the loan has to be paid off in full.

This is usually done by selling the property to raise the capital to pay back the equity in the loan or by remortgaging. However, when it comes to remortgaging, the interest rate on the new loan has to make sense as it would be stretched out for a greater length of time, likely 20 + years.

How to apply for a 5% deposit mortgage

Depending on the lender you go with, there are a range of different affordability checks that can be done to see if you can afford a 95% mortgage.

Typically, this comes in two main categories: affordability testing and credit referencing. If you aren’t eligible for a 955 mortgage, consider using a shared ownership scheme for instance.

Affordability testing

When applying for a mortgage, lenders will want to understand not only your income to conduct a mortgage capacity report but also your spending habits, any existing debt, and any potential changes to your income.

They may also inquire about one-time expenses, such as holidays, and ask if you have savings for a mortgage deposit. The lender may also conduct an interview to evaluate your ability to afford mortgage repayments.

This is useful in addition to a credit check as a credit check is often a complete overview of the financial stability of an individual and if they are ready to take on debt that they could be paying off for the next 40 years.

A solicitor working on a 95% mortgage

Credit score

Having a bad credit score will greatly impact your ability to find a mortgage you’ll be able to gain approval for. Even in a soft credit check in a mortgage in principle, there has to be a decent credit score available for the lender to give the right approval for the mortgage.

In order to increase a credit score so you can find the right 95 mortgage for you, it is likely you’ll have to make consistent payments on a credit or debit card to show that you’re managing your finances responsibly.

There are also smaller hacks like registering to vote that are easy tasks to do that can bring a credit score up by a lot. To find out more tips like this, we recommend you read our article on the topic of credit scores.

What are the pros and cons of 95% mortgages?

So all in all, what are the pros and cons of a 95% mortgage under the mortgage guarantee scheme? Well, there are a few to go over and a few that you may not have thought of.

So before you pull the trigger on our next house purchase, read on for a breakdown of the scheme and 95% mortgages. 

Pros of 95% mortgages

First of all, looking at the benefits of using a 95% mortgage as a landlord, there are four main things to consider. Saving time, allowing a mortgage to work out a lot cheaper, saving money and allowing you to borrow over a shorter time period.

Find out more about this below:

Save time

Using a 95% mortgage can save you time because you won’t have to save up for a deposit for as long because the deposit is only 5%. This means the deposit can be acquired in a much shorter period of time.

Saving up for a deposit is the biggest reason why it takes longer for people to get on the housing ladder overall.

Depending on the house, it is often the case that the mortgage payments are less than the price of renting an equivalent home.

As a result, it is not the monthly payments that most struggle to meet when moving out but it is instead the large deposit of money that must be saved up.

A mortgage works out a lot cheaper

Mortgages are often cheaper than rent and the sooner you’re able to get on the housing ladder, the less you will spend on rent if this is the case.

However, there is always a tradeoff and a homeowner has to consider they are acquiring responsibility for the home which means they will likely have further expenses as they take care of the property anyway.

Saves money for first time buyers

Some mortgage deals are fee free. This is there as a further incentive for first time buyers to gain access to the housing ladder.

You can borrow over a longer time period

Because of the larger loan involved in a 95% mortgage, it is common for these types of mortgages to be stretched out over a longer period of time.

This minimises the repayments involved on the mortgage which makes 95% mortgages more likely to be under the average price of rent.

Nonetheless, the smaller deposit also means the interest rate on the house also goes up which is one of the cons of borrowing with a 95% mortgage.

interest rates for a 95% mortgage on a clipboard

Cons of 95% mortgages

Below are some of the things to look out for when it comes to 95% mortgages and you can find more on the government website here.

High monthly repayments

As discussed as part of the advantages of a 95% mortgage, there is a chance that the landlord is able to stretch the length of the loan over a longer period of time because of how large the proportion of the loans is to the value there is in the home in a deposit.

The disadvantage of this is the interest payments on a mortgage like this rises accordingly. 

stricter criteria for lending

All mortgages require a stringent credit check, however, there may be additional or tighter stress tests and credit checks for those who are applying for a 95% mortgage because of the amount of land that the individual would be taking on.

When compared to other types of mortgages such as buy-to-lets, there is a significantly smaller amount of equity from the landlord in the deal.

This means lenders have to take precautions to make sure their property is able to be paid off most of the time and if it is the case a house has to be repossessed, the bank is able to pull out enough of their money to still make money.

95% mortgages can also only be used for residential properties. This means you cannot deduct mortgage costs like described in the new section 24 rules for buy to lets. 

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Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.


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