What Are 95% Mortgages?

Homeownership is one of the great financial and personal goals the world over, and Britain is no exception. At the same time, home prices can be quite expensive, especially for first-time buyers struggling to meet the price of a mortgage. If this is you, however, you still have options.

Ninety-five percent mortgages are the most commonly mentioned of these, but what exactly are they, how do they work, and are they right for you?

Of course, these lenders aren’t just giving money away. There are several strings attached, not the least of which being having a good credit record and having a stable income that earns enough to satisfy your lender.

In addition, you’ll need to pass an Affordability Test. This examines your income still further, taking your expenditures, debit, and other factors into consideration to help determine if the property in question and the interest rates for paying back a 95% mortgage loan are “affordable” for you. 

They may also run a “stress test” on your finances, which involves checking to see whether you would still be able to afford mortgage payments in the event the interest rates rise or you run into financial difficulty. For example, furloughs have been common during COVID, and so this would be a potential factor they would account for in their “stress tests.”

It is advisable to speak to mortgage brokers or real estate experts before applying to put yourself in the best possible position to be accepted.

In theory, you can borrow as much as five times your present salary (or combined salary if you are a co-buyer with another person).

It is important to note that these loans often come with high interest rates due to the elevated risk for the lender.

Another good thing about 95% mortgages is that it is possible to seek assistance from family members. For example, they can help gift you money to help you afford the deposit. If this is the case, however, you’ll need to prove to the lender that this is a true “gift” and not another loan you’ll need to pay back.

Alternatively, they can act as the guarantor of your loan. For example, they could put up capital or property as collateral.

The first and most obvious disadvantage of a loan like this is, as mentioned, the high interest rates. As a result, it may be better to save up so you can put down more than just 5% for your deposit so you can avoid higher interest rates up to 95% later on.

At the same time, it is also hard to re-mortgage a 95% loan. Once you are locked into the terms of the loan, it is very difficult to change them, so you need to be careful to make sure that you know what you’re getting yourself into and that you’re up to it.

In addition, if the value of your home starts to plummet, you could be put in a position where you are stuck with negative equity.

If this occurs, this could mean that you owe more on the mortgage than the total rate of the property – which obviously isn’t what you intended when you tried to purchase the home in the first place. The more equity there is in your home, the smaller this risk is. As such, if you want to avoid the risk of negative equity, you want to put a larger deposit down at the start, which naturally contradicts the basic nature of a 95% mortgage.

If a 95% loan is ultimately considered to be too expensive or otherwise not right for you, either by yourself or the lender, Help to Buy or Shared Ownership loans are other options to consider.

Under a Shared Ownership plan, you can purchase as much as 25% to 75% of a given property and pay rent on the remaining amount. You only pay mortgage rates on the share of the property you own, so this can help you borrow at and thus qualify for lower interest rates. That said, if you aren’t careful, the combination of rent and the mortgage can add up fast, which in turn can mean paying more than you might have otherwise, so you need to do your research.

Help to Buy loans involve putting down a deposit of at least 5% and seeking out government assistance for more. (The current rates are 40% in London, 20% in the remainder of England as well as Wales, and 15% in Scotland.) Once again, this means that you only need to pay for part of the mortgage at a given time. That said, this can also run into the issue of costs adding up on you in a hurry if you aren’t careful and don’t calculate everything ahead of time before signing on the dotted line.

There are several options for making homeownership affordable, and real estate services can help you narrow them down and determine which ones are best suited to your needs and budget.

Scope out some initial properties, think over your options, and when you’re ready, place a call to a real estate expert and see if a 95% mortgage or other lending options are right for you.