95% and 100% mortgages
Over recent years the size of the average first time buyer deposit that lenders have wanted from first time buyers has significantly increased. In the past there were many more 95% mortgages available and 100% or even 125% mortgages were not uncommon but now there are much fewer of them.
What is a 95% mortgage?
Basically with a 95% mortgage you borrow 95% of the property’s value and use a 5% deposit to pay for the rest. So, for example, on a house valued at £200,000, you could borrow £190,000 using a 95% mortgage, and would need a deposit of £10,000.
The main benefit of this kind of loan is that you only need a relatively small deposit but there are downsides too. These loans are risky both for you and the lender because the deposit cushion is quite small. If your house dropped in value by more than 5% the mortgage would be worth more than the property, known as being in negative equity.
Being in negative equity can make it very difficult for you to move house or to remortgage onto another deal. And for lenders this means if you ever got into mortgage arrears they would not be able to get their money back by repossessing the house.
Because of the greater level of risk interest rates for this type of loan tend to be higher too which means that even if you have enough saved up to put down a deposit lenders may decide based on their affordability checks that you can’t afford the repayments.
But there are still some 95% mortgages out there and they will be appropriate for some borrowers. Our advisers can help to identify if a 95% mortgage is the right option for you.
NewBuy and Help to Buy
One situation where 95% mortgages are more commonplace is under the NewBuy scheme, a government initiative which aims to make newly built property affordable for first time buyers. The scheme will allow you to buy a new property worth up to £500,000 using a 90% – 95% mortgage.
The government’s Help to Buy scheme also offers mortgages for people with a deposit of between 5% and 20%. The first help to buy mortgages will be available from 7th October.
To make the loans less risky for lenders housing developers will underwrite 3.5% of the purchase price of the property and the government will guarantee 5.5%. But that all happens behind the scenes and to the buyer it is no different to any other mortgage.
What is a 100% mortgage?
With a 100% mortgage you borrow the entire purchase price of the property and put down no deposit. The obvious advantage here is that you don’t need to have any savings in place to buy a home. But there are huge risks associated with this kind of loan.
All of the same problems with 95% loans are magnified, because you own no equity in the home there is a very high risk of you falling into negative equity.
Because these loans are so high risk they are virtually non-existent in the marketplace now. The exceptions are specialist products such as family offset mortgages which you may wish to consider if you are struggling to save up a deposit.
Impartial Mortgage Advice
No matter how much you are able to save there will be options available to you but these will all depend on your individual circumstances. To discuss what choices are available to help you get on the housing ladder, you can speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back.