Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
95% mortgages: What you need to know
Plenty of lenders will let you borrow 95% of a property's value. Find a 5% deposit mortgage and buy your dream home sooner.
Most lenders prefer that you have a deposit that is at least 20% of the property’s value. This means that you’ll get a mortgage of a loan-to-value (LTV) ratio of 80%, which is the amount you can borrow as a percentage of the property value. For lenders, the larger the deposit you can pay up-front, the less risk you pose. For you, it usually ensures that you get the lowest interest rates and as a result have lower monthly repayments.
However, many people in the UK struggle to save that much, especially first-time buyers. This is why more lenders now offer low deposit loans that come with an LTV as high as 95%.
The government guarantee scheme for 95% mortgages
In the March 2021 Budget, Chancellor Rishi Sunak announced a new government mortgage guarantee scheme designed to help homebuyers with a 5% deposit. Under the scheme, first-time buyers, home movers and previous homeowners with a 5% deposit will now have access to 95% loan-to-value (LTV) mortgages, which had disappeared from the market over the first 12 months of the coronavirus pandemic. The scheme works by providing mortgage lenders with a government-backed guarantee for providing such a high LTV mortgage. The scheme will run from April 2021 to December 2023, and is open to people with a deposit of 5% who are looking to buy a main residential home in the UK, worth £600,000 or less. Learn more about the scheme.How can I get a mortgage with a 5% deposit?
While the banks might advertise that you can borrow up to 95% of the purchase price of your new home, it’s important to realise that you’ll have to meet some lending criteria.
- Good credit history. In order to get your loan approved at a high LTV ratio like 95%, you will need to have a clean credit history. This means you should have no defaults showing on your credit report for missed payments on other bills.
- Good employment history.Some lenders require you to have spent as much as three years in the same job before offering you a mortgage, while some may ask for as little as three months. In the case of low deposit mortgages it’s likely that most providers will want you to be able to show that you have a stable job.
- Genuine savings. If you can show where your 5% savings came from, this will go in your favour. For example, showing your savings account statements with regular deposits going into it will be viewed positively.
- Controlled debts. If you submit your mortgage application and it shows that you have several credit cards, a car loan and a personal loan all outstanding, it’s likely your loan will be declined. Consolidate your debts and pay off the most urgent ones. For example, credit card debt is a bigger red flag for a lender than a student loan.
Are there any government schemes that can help?
Yes. In order to incentivise people to buy homes, the government has several schemes you can take advantage of. However, these schemes are specifically aimed at first-time buyers to help them get on the property ladder.
- Shared ownership. Shared ownership schemes allow you to buy a share in a property through a council or housing association, and pay rent on the part of the property you don’t own. You need a mortgage to pay for your share, which can be between 25% and 75% of the property’s full value. You then pay a reduced rent on the share you don’t own. Later you can choose to buy a larger share in the property up to 100% of its value. This scheme is available for anyone who has a household income of less than £80,000 (outside London) or £90,000 (in London). Only military personnel get priority over other groups.
- Help to Buy: This scheme is aimed specifically at first-time buyers. It allows you to get a low-interest loan towards your deposit in the event that you can’t save a large enough deposit. For example, if you have savings for a 5% deposit, the government will lend you up to 20% (40% in London) interest-free for five years. As a result, the mortgage you get will be for 75% (55% in London) of the property’s value. This scheme comes with some conditions.
- Home Ownership for People with Long-Term Disabilities (HOLD). This scheme applies if you have a long-term disability. You can only apply for HOLD if the properties available through the other home ownership schemes don’t meet your needs; for example, you need a ground-floor property so you don’t have to climb stairs.
- Older People’s Shared Ownership. If you’re aged 55 and older, you can get help from a home ownership scheme tailored for older people. It works in the same way as the general shared ownership scheme, but you can only buy up to 75% of your home. Once you own 75%, you won’t have to pay rent on the remaining share.
A smaller deposit means paying more in interest
Getting a mortgage with such a small deposit inevitably means paying more in interest over time. The difference in interest you’ll pay over the life of the loan can be significant depending on the size of your deposit. Here’s an example:
Property cost: £250,000
- 20% deposit = £50,000 (loan amount of £200,000)
- Interest rate: 2.20%
- Loan term: 25 years
- Monthly repayments: £867
Property cost: £250,000
- 5% deposit = £12,500 (loan amount of £237,500)
- Interest rate: 3.84%
- Loan term: 25 years
- Monthly repayments: £1,233
Can I get a 100% LTV mortgage?
Zero-deposit mortgages are largely a thing of the past – banks typically won’t throw 100% of a property’s value at you. But there are some exceptions.
- Guarantee from parents. If your parents own their home and are happy to act as guarantors on your mortgage, you could borrow 100% of the purchase price of your new home without having any savings. Essentially, the bank takes a guarantee from your parents that is secured by the equity they have in their own property. Just be absolutely sure that you and your parents understand all the implications of being a guarantor before you enter into this type of agreement.
- Existing property. If you already have equity in your family home, you may be able to use this to secure the purchase of your next property. Effectively, this lets you borrow 100% of the purchase price of your new property without having any savings.
If you have generous parents with some cash in the bank, they might give you part of your deposit as a gift. If you’re able to reduce your loan amount so you’re only borrowing 90% of the purchase price, some banks won’t ask you to prove that you have genuine savings. This means your parents need to come up with 10% of the purchase price and offer it to you as a gift.
How do I apply for a low deposit mortgage?
To apply for a mortgage you need to meet some basic requirements:
- Be at least 18 years of age
- Have a good credit history
- Have a good employment history
What documents will I need to provide?
Getting all the documents you’ll need for a mortgage application can be a time-consuming process, especially if you have to ask others to provide them. Here’s a list of documents that are usually required:
- Proof of identity. This can be a valid passport or driver’s licence.
- Utility bills. These usually must be dated within three months and must be under your name and address.
- Council tax statement. Latest one available.
- Bank statements. Physical statements are required if you use these as proof of address as well.
- Payslips. Most lenders require payslips going back at least three months. However, it can vary depending on the mortgage provider. Online payslips are usually acceptable these days if they include your personal details on them.
- Bank statements. Most lenders require statements going back at least three months. Lenders use this to assess your incoming and outgoings, including the amount of debt you may have from credit cards or other loans.
- P60. This may be required if you have bonus income.
- SA302. Going back two or three years if you are self-employed.
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