Everything you need to know about the new 95pc mortgages
If you’re a first time buyer, getting on the property ladder can feel like an intimidating thing to do. You need to have a lot of money saved up to buy the home of your dreams and applying for a mortgage can feel like a complex, formidable maze of paperwork, bank statements and credit scores.
However, there is a way of making buying a home a bit easier: 95% mortgages. Here’s everything you need to know so that you can consider whether or not it’s a good option for you.
What is a 95% mortgage?
A 95% mortgage is one where the loan you’re borrowing to buy a home is worth 95% of the value of the property. This means that if you bought a house for £180,000, you’d need to put down £9,000 as a deposit (5%) and borrow a mortgage of £171,000 (95%).
What’s the risk?
All mortgages are ‘risky’ (in the sense that it’s likely to be your largest financial commitment ever, and comes with lots of responsibility attached). However, 95% mortgages are thought to be riskier (though not as risky as a 100% mortgage), as such a large loan usually means you’re going to have to pay a higher rate of interest. This is due to the fact that you’re considered to be a ‘higher risk’ to the lender than someone who’s got a 40% deposit, for example.
The other risk is that it’s a very large loan to take on considering that you don’t know how the property market is going to change over time. If the value of your home falls, you could end up owning less than 5% of the property’s value or even end up in negative equity (something that happens if you owe more money than your home is actually worth).
So are 95% mortgages a good thing?
Yes – they can be. Like any mortgage deal, you need to make sure you can actually afford to repay a 95% mortgage (thinking about your income, outgoings and credit score), but for those who can manage a loan of this size it can mean the difference between getting on the property ladder and not.
Could a Help to Buy mortgage be the answer?
It could be – Help to Buy mortgages are ones where the lenders are able to get government-backed guarantees on every 95% mortgage they offer. This doesn’t mean that the government gives the lender any money upfront, but instead means that the government promises to repay a fixed amount to the lender in the event you default on your mortgage. This makes you a less risky investment, meaning you’re likely to get a better deal on the rate of interest you pay.
The Help to Buy mortgage is just one aspect of the government’s Help to Buy Scheme and could be a safer route to go down than a 95% mortgage without any government backing. Does it sound like a good idea to so? If so, Help to Buy schemes on new builds are commonplace around the UK nowadays, so it might be worth narrowing your house search to new build properties and new housing estates if you want to take advantage of a lower-risk 95% mortgage.