First time buyers have the opportunity to get on the property ladder faster by contributing only a 5% cash deposit towards their property value, as some high street lenders are offering 95% mortgage loans. Licensed Conveyancer, Laura Foster, explains more.
First time buyers
A first time buyer is defined as an individual(s) who has never owned a legal interest in a residential property in the UK, or anywhere else in the world, and intends to reside at the property as their main residence.
A 95% mortgage is a secured mortgage loan on the property that will cover 95% of the property value with you contributing the remaining 5% as a cash deposit. 95% mortgages are sometimes also referred to as 95% LTV (loan to value) mortgages. For example, if you wanted to buy a home for £200,000, you will need to provide a 5% deposit of £10,000 and obtain a 95% mortgage loan for the remaining £190,000 balance.
95% mortgages are very appealing to first time buyers who sometimes struggle to save up beyond a 5% deposit. The acceptance of a 5% deposit by lenders helps to support a new generation in home ownership and allows them access to mortgage loans without the need for a large cash deposit.
Buying your first home can become expensive and many first time buyers underestimate the other additional costs such as surveys and legal work which is required to purchase a property. The option of a 95% mortgage loan to value can ease some of that pressure.
We would suggest you seek the advice of a financial advisor to consider your options and whether a 5% deposit and 95% mortgage loan is suitable for you, depending on your personal and individual circumstances.
Please be aware that 95% mortgage loan product availability may be more limited than those who are able to provide a higher cash deposit. The mortgage interest rates are also known to be higher if you are providing a 5% deposit, as the mortgage lender is taking on a larger risk when they are providing a mortgage loan at 95% of the property value. Therefore, if you are able to save a 10% deposit, you are more likely to access a wider range of mortgage products and obtain a cheaper overall mortgage.
As you make mortgage repayments over a period of time your equity in the property increases. However, if you purchase a property with a 5% deposit and subsequently property prices fall, you are more likely to be at risk of becoming in negative equity. Negative equity occurs when your property value becomes less than the secured mortgage amount on the property and this could become problematic when you re-mortgage or need to sell the property.
The lender will need you to pass their affordability requirements in order to obtain a 95% loan to value mortgage which will factor in your financial circumstances to confirm the loan is affordable for you. Nevertheless, your circumstances may change in the future and you could struggle to keep up with the large mortgage repayments, so you should take this into consideration when applying for a mortgage.
Government backed mortgage scheme
The government also released a mortgage scheme in spring 2021 which offers 95% mortgages available to both first time buyers and also current home owners.
The scheme is a temporary measure due to run until December 2022, when the government will review to determine whether extending the period of eligibility for new mortgages continue to deliver benefits for prospective and current home owners.
There will be no material or financial difference to you in obtaining a 95% mortgage loan offered inside or outside of this government scheme, but the government will offer the lender an option to purchase a guarantee if the mortgage lender opts into the scheme. The guarantee will then compensate the lender for a proportion of the net losses suffered in the event of repossession of the property.
Saving for a large deposit can be difficult for first time buyers and the 95% mortgage loans available provides a more affordable route for aspiring buyers to get on the property ladder. Please be aware any mortgage loan will be subject to the usual criteria and affordability checks, such as incomings, outgoings, debt, credit record and credit scores. We would recommend you make enquiries through a mortgage advisor and lenders directly for their requirements and mortgage products available to you.