95% LTV Mortgages
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In the ever-evolving landscape of the UK mortgage market, 95% mortgages have become a prominent fixture, providing prospective homebuyers with the opportunity to step onto the property ladder with just a 5% deposit. With money being a crucial factor, in this guide, we will delve deep into the nuances of 95% mortgages, exploring its advantages, disadvantages, and how to select the right deal that suits your financial standing and home-owning aspirations.
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Written by:
Alison Gibson
Ascot Mortgage Expert
Last Updated:
06.10.2023
Written by:
Alison Gibson
Ascot Mortgage Expert
Last Updated:
06.10.2023
What are 95% Mortgages?
At its core, a 95% mortgage refers to a loan arrangement where you borrow 95% of the property’s price and pay a deposit of 5%. The ltv or loan-to-value percentage stands at 95%, meaning the lender fronts a substantial portion of the house price, leveraging a higher percentage of the property value compared to other mortgage types. Here, financial institutions play a vital role in making home ownership possible with less money down. Let us break down the fundamental components of a 95% mortgage:
- Loan-to-Value (LTV): The LTV represents the percentage of the property’s value that you are borrowing. A 95% LTV mortgage translates to a loan covering 95% of the home’s value, with the buyer responsible for the remaining 5%.
- Deposit: The deposit in a 95% mortgage is typically 5%. This initial pay functions as your equity in the property and represents the initial money you invest in your home.
- Interest Rate: The interest rate is a crucial factor, influencing your monthly repayment sums. Generally, 95% mortgages come with a higher interest rate compared to mortgages with a lower LTV ratio.
- Monthly Repayments: These are the repayment amounts you pay on a monthly basis to the lender, encompassing the loan principal and interest.
- Mortgage Term: It is the period over which you will repay the loan. Extended terms may offer lower monthly repayments, but accumulate more interest over time.
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Should you continue to save for a larger deposit than 5%?
Before committing to a 5% deposit scheme, it’s important to weigh the pros and cons. Saving more money for a larger deposit could offer a range of benefits, including:
- Lower Interest Rates: Banks often offer lower interest rates to individuals with a larger deposit, translating to lower monthly repayments.
- Access to Better Deals: A higher deposit can unlock better mortgage deals with more favourable terms.
- Reduced Risk of Negative Equity: The risk of falling into negative equity is reduced, as a larger deposit provides a buffer against fluctuations in property prices.
However, saving a more considerable sum demands time and patience, potentially delaying your plans to buy a home. Moreover, rising house prices could outpace your saving rate, an aspect worth considering in your decision-making process.
Can you get a 95% mortgage?
Securing a 95% mortgage is indeed possible, especially with the introduction of the government-backed 95% mortgage guarantee scheme. However, eligibility hinges on a variety of factors, such as:
- Credit Score: Your credit score is a pivotal element, with a good credit history increasing the likelihood of securing a loan.
- Affordability: Lenders assess your income and expenditure to determine how much you can afford to borrow.
- Employment Status: Stable employment can enhance your chances, as lenders favor applicants with a steady income.
- Debt Level: Existing debts can impinge on your borrowing capacity; therefore, keeping debts minimal is advised.
- Property Type: The type of property you aim to buy can influence the lender’s decision.
It is advisable to consult with a mortgage advisor to navigate the intricacies and secure a suitable deal.
What are the advantages of 95% Mortgages?
Opting for a 95% mortgage comes with an array of advantages:
- Lower Upfront Costs: The chief benefit is the reduced initial cost, facilitating home ownership with just a 5% deposit.
- Accessibility: 95 mortgages for first-time buyers offer an accessible pathway to enter the property market.
- Capital Appreciation: With a foothold in the property market, you stand to benefit from potential capital appreciation.
- Early Home Ownership: The lower deposit requirement means you can buy a home sooner than later, potentially in a preferred location.
- Guarantee Scheme: The government’s guarantee scheme offers a safety net to lenders, encouraging them to offer 95% mortgages.
What are the disadvantages of 95% Mortgages?
However, the 95% mortgage option is not devoid of drawbacks:
- Higher Interest Rates: The interest rate tends to be higher, leading to increased monthly repayments.
- Risk of Negative Equity: With a smaller deposit, you face a higher risk of negative equity, particularly if house prices decline.
- Limited Property Choices: You may find your choices somewhat limited, as not all properties qualify for a 95% ltv mortgage.
- Stricter Criteria: Lenders may impose stringent criteria, scrutinizing your credit history and financial stability meticulously.
- More Expensive in the Long Run: The cumulative interest over the loan term can make this option more costly over time.
Alison Gibson
Ascot Mortgage Expert
Remortgage
Remortgaging is applied when you keep
living in your present property while applying for another mortgage deal with a new lender. Before finding out how to remortgage and get the best offers from experts like Ascot Mortgages, you have to check meeting what parameters of the deal that can help you succeed the most. The range of background factors varies a lot — from the recently changed loan-to-value ratio or your existing agreement coming to an end.
Whether you are trying to get a more beneficial deal or searching for funding to improve your home conditions, remortgaging is one of the most advantageous scenarios to consider.
How does the 95% Mortgage Guarantee Scheme Work?
In a bid to stimulate the property market, the UK government introduced the 95% mortgage guarantee scheme. Under this scheme:
- Government’s Role: The government offers a guarantee to lenders, covering a portion of the losses if the borrower defaults, thus safeguarding the lender’s money.
- Eligibility: The scheme is designed for property purchases up to £600,000, aiming to assist a broad demographic, including 95 mortgages for first-time buyers, and making it easier for more people to invest money in property.
- Lender Participation: Various lenders participate in the scheme, availing 95% mortgages to potential homebuyers and providing more opportunities for people to borrow money for home purchases.
- Positive Impact on Property Market: The scheme has rejuvenated the property market, fostering more transactions and buoyancy in property prices.
- Duration: The guarantee scheme has a predetermined lifespan, so it’s imperative to check its availability and the latest updates when planning your purchase.
Choosing the Right 95% Mortgage
Selecting the right 95% mortgage requires a meticulous approach. Here, we lay down a roadmap to help you make an informed decision:
- Research: Start with comprehensive research to understand the different offers available in the market, including interest rates and repayment terms.
- Professional Advice: Seek advice from a professional mortgage advisor to align your choices with your financial reality.
- Budgeting: Craft a realistic budget that encompasses all costs involved, including deposit, monthly repayments, and other associated fees.
- Credit Score: Work on enhancing your credit score to augment your chances of securing a favorable deal.
- Comparing Deals: Use mortgage comparison tools to evaluate various deals, considering the interest rate, repayment terms, and potential monthly outlays.
- Emergency Fund: Establish an emergency fund to cushion yourself against unforeseen circumstances and ensure smooth repayment.
In conclusion, 95% mortgages offer a viable route to home ownership, particularly benefiting first-time buyers. While it comes with its set of pros and cons, making an informed decision guided by professional advice can pave the way for a successful home purchase. Engaging with a mortgage advisor with a robust understanding of the UK market dynamics can be your first step towards securing your dream home through a 95% ltv mortgage.
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FAQ
Yes, it’s possible to use a 5% deposit mortgage for remortgaging or refinancing, but it largely depends on the equity you have in your property. If your property has appreciated in value or you’ve significantly reduced the outstanding loan balance, you could be in a position to remortgage with a 95% LTV. However, it’s essential to consider any early repayment charges or fees with your current mortgage and the benefits of switching.
A 95% LTV mortgage means you’re only putting down a 5% deposit and borrowing 95% of the property’s value. This often results in:
– Higher Interest Rates: Generally, higher LTVs like 95% may come with higher interest rates compared to lower LTVs, which can lead to higher monthly payments.
– Larger Loan Amount: As you’re borrowing a significant portion of the property’s value, your monthly repayments will be based on this higher amount.
It’s always advisable to review and compare mortgage offers to determine the monthly costs and overall affordability.
The deposit size itself, be it 5% or otherwise, doesn’t have direct tax implications. However, if this is a second property, you’ll be subject to an additional 3% Stamp Duty Land Tax (SDLT) on top of the standard rates. If you’re buying a home in Scotland or Wales, the tax rules differ with the Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively. Always consult with a tax advisor or solicitor to understand any potential tax obligations.
If the property value decreases after you’ve secured a 95% mortgage, you could find yourself in negative equity. This means you owe more on the mortgage than the property is currently worth. It can pose challenges if you wish to move home or remortgage, as selling the property wouldn’t cover the full mortgage amount. In such situations, it’s crucial to speak with your mortgage lender or a mortgage advisor to discuss the best course of action, which might include staying put until property values recover or making overpayments to reduce the mortgage balance.
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Ascot Mortgages authorised and regulated by the Financial Conduct Authority and can be found on the FCA register (www.fca.org.uk) under reference 776062. The FCA do not regulate some forms of mortgages. The guidance and advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. There may be a fee for mortgage advice. The precise amount will depend upon your circumstances but we estimate it will be £399 per mortgage account. Ascot Mortgages Ltd give you the option to pay a non-refundable fee of £879 payable with the application. If this option is taken, Ascot Mortgages Ltd will refund any procuration fee received by the lender.
Ascot Mortgages Limited is registered in England and Wales and have their registered office at 8 Webster Court, Westbrook, Warrington, WA5 8WD. The company’s registration number is 06764971.
We are a credit broker, not a lender. We work with the whole of the lending market. We may receive commissions that will vary depending on the lender, product, or other permissible factors. The nature any commissions model will be confirmed to you before you proceed.
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