95% LTV mortgages guide
People need mortgages for all sorts of reasons, and they can make life easier when buying property. It is good to know what mortgages and loans are available so you can choose one that meets your needs and suits your income.
If you have been wondering what a 95% LTV mortgage is and how to get one, you’ve come to the right place. Here is everything you should know:
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What are 95% LTV mortgages?
95% LTV mortgages are mortgages that have a 95 percent loan-to-value ratio. A loan-to-value ratio measures how much money you have borrowed as a percentage of the asset’s value against which it is secured.
A buyer must put down a 5% deposit if they take out a mortgage with a 95% loan-to-value ratio. For example, if you purchase a property priced at £100,000, your mortgage will be £95,000, and you must put down £5,000.
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How to get A 5% deposit mortgage in the UK
Depending on how you apply for a 5% deposit mortgage, there may be differences in the processes you must follow and the exact requirements. Prepare for your application thoroughly by following these steps:
Download all of your credit history and reports
If you want a 5% down payment mortgage you’ll need the best possible credit history. Download your reports in advance so you can correct inaccuracies, have out-of-date material removed, and prepare for potential problems.
The more prepared you are, the better: make sure your documents are in order, accurate, and easy to read.
Chat with a mortgage broker
Given how challenging it has recently been to obtain a mortgage with a 5% down payment, this step is strongly advised. Mortgage brokers with expertise in low-deposit lending can walk you through your options and significantly increase the likelihood that your mortgage application will be approved.
They can assist you in obtaining the best rates and completing the necessary documentation. If you work with a mortgage broker, they can help you with application preparation, document preparation, and credit report optimization.
The potential buyer would then apply for a 95% mortgage in principle, a lender’s tentative agreement outlining the terms and conditions of the amount they are prepared to loan you.
Not all lenders will do this; some will want to skip this step and go straight to your full application. It is always a good idea to get expert mortgage advice so you can be sure that you are making the right decision when it comes down to it.
Get all your documents ready
You must provide official documentation to prove your address, identity, deposit funds, and income. You can save a lot of time when you start the mortgage application process by having all of your documents prepared in advance.
All mortgage providers are different and may not require the same documentation, but in general, there are some basic documents that you will always need.
How it works
The mortgage loan itself functions the same as any other type of mortgage. Still, eligibility requirements could be stricter because lending to a borrower with a small deposit increases the risk for the mortgage provider – especially with a large mortgage.
The application procedure may also differ slightly depending on how you’re applying for a 5% deposit mortgage. Various lenders offer 95% LTV mortgages themselves, while others use the Help to Buy scheme (or other shared ownership plans).
A 5% deposit is required for a mortgage with a 95% LTV. If you’re remortgaging or moving, the funds may come from the current home’s equity or the money you saved up to purchase your first home.
Other than a 5% deposit, you will also need to meet your specific lender’s eligibility criteria to be approved. Generally, this means you can prove that you can make monthly mortgage payments and have a good credit rating.
Most lenders will only allow you to borrow up to four and a half times your monthly wage, and they’ll be less inclined to do so if you have a lower down payment. Once you’ve obtained a 95% mortgage, you must make regular payments to cover your debts, including the loan’s interest.
Your monthly repayments depend on if you choose a variable-rate mortgage, a fixed-rate mortgage, the length of the term, and the deal you secure.
Negative equity is one risk to take into account. Your property can be worth less than what you owe on your mortgage if you have a 95% mortgage and the value of your home unexpectedly decreases. In this case, you will be left paying loads of interest on a loan that is bigger than your current property value.
How much can you borrow?
Your financial situation, your salary, and whether you match the lender’s specific affordability requirements will all impact how much you can borrow for a mortgage. The following are some of the things that lenders will take into account:
- Your debts
- Your monthly income
- Your outgoings
- Any other sources of income
- Your credit history
- Your dependents
With a 95% mortgage, you may borrow up to four times your annual wage. It might be a little less than this if you’re getting a mortgage with someone else and basing it on two earnings.
All mortgage lenders will use their own criteria to decide who they would like to lend to and how much they are willing to lend. No two lenders are the same.
A 95% mortgage can be suitable if you can afford the monthly mortgage payment. And you can lower the interest rate and reduce the overall amount by saving more on your deposit.
5% Deposit mortgages: Pros and cons
Pros
- Better than renting a place: For most, that is. If you want to buy a home but don’t think you can save a 10% deposit, 95% LTV mortgages and 5% deposit programs may provide you access to the property ladder you otherwise wouldn’t have.
- Spend less time saving up: Saving money for your deposit often takes up the most time, so buying a property with a small deposit amount will speed up your homeownership process.
- Long fixed rates are available to you: 95% LTV mortgages now include various products with five-year fixed-rate periods to get a favourable interest rate.
- Attractive rates are available to you: Since schemes like Help to Buy are targeted at first-time buyers, the interest rates on offer are pretty competitive.
Cons
- The more money you borrow, the more you have to pay back: Even though it might seem simple, weigh the pros and drawbacks of borrowing 95% of the property’s value vs waiting a little longer to save up and borrowing 90%. Not only would your monthly payments be a little bit more, but for the whole length of your mortgage, you would also be paying interest on that extra 5%.
- Limited equity: You would only have 5% equity in your home if you took out a 95% mortgage, which puts you at risk of negative equity in the event of a market collapse in the years after the COVID-19 catastrophe.
- Property restrictions: There are restrictions on the property types of many of these plans and products. Some are only offered in newly constructed homes, while others are completely unavailable.
- Government scheme limits: Many people were able to purchase a home thanks to programs like Help to Buy, but there are some disadvantages as well. For example, five years after you have bought your home, your monthly repayments will increase due to the interest. It can also be challenging to remortgage if you have not fully paid off the equity loan.
When 95% mortgages come in handy
Remortgaging
Remortgaging and obtaining a new 95% LTV mortgage are both doable, but they can be challenging. When you refinance, lenders typically prefer that you have more equity in your property. You may be able to find a good deal if you look around, though.
However, interest rates will be higher, which means the deal you get will cost you more. If you had a 100% LTV mortgage, then going on to a 95% mortgage may be a good idea as you stand the chance of getting a much better rate.
If you decide to remortgage so you can access the equity of your property so that you can finance your improvements, it may be best to wait till you have built up a lot more equity or to get a lower LTV.
Buying your very first home
A 95% mortgage is a popular alternative for those who can’t afford to save up on a significant deposit. However, interest rates on this mortgage aren’t as affordable as for a mortgage with a lower LTV ratio. You will get much better deals with a 10% deposit.
Also, remember that some mortgage lenders won’t work with first-time buyers even with a 5% deposit, so be sure to research this before submitting an application.
Moving home
If you want to move house, you could use the equity in your current property along with any additional savings and use that for your deposit. If that comes up to 5% of your new property’s total value, you could get a 95% mortgage.
What to consider
First-time buyer schemes
There are additional schemes for those struggling to make the 5% deposit. First-time buyer schemes are excellent options and are government-approved.
Shared ownership: This scheme allows first-time buyers to purchase a share of their property between 10-75% and pay rent below the market for everything else.
Lifetime ISA: Motivate first-time buyers to save up for their deposits by offering a top-up of 25% from the government.
Help to Buy Equity Loan: Gives first-time buyers the chance to boost their deposit when they buy a new-build property.
Fixed-rate vs variable-rate mortgages
Your lender will charge you interest when you take out a loan. Your monthly payments and the total amount you will eventually pay may change depending on whether the interest rate is fixed or variable.
With a fixed-rate mortgage, the interest rate stays the same for a predetermined period, so you are aware of the number of your monthly payments. These are typically more expensive initially, but you gain security in exchange.
If you obtain a mortgage with a variable rate, the interest follows a different financial metric, typically the Bank of England base rate. This affects how much you pay each month, which may increase or decrease.
95% loan-to-value mortgages guide – Final overview
Making your way up the property ladder can be challenging. Luckily, various mortgage schemes can make getting a property a reachable goal and an actual reality.
There are loads of mortgage options and 95% ltv lenders available to you, and it’s up to you to make the time and find your perfect match.
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