95% Mortgages: Everything You Need to Know

Posted on: Wednesday, March 3, 2021

Since March 2020, low deposit deals have virtually disappeared from the mortgage market, hitting first-time buyers hard, as well as those with low levels of equity in their property. During the COVID-19 pandemic, lenders saw these deals as high-risk and withdrew most of their offerings. The Government has now announced that it will be backing a new mortgage guarantee scheme to combat this.

During the 2021 Budget on 3 March 2021, Chancellor Rishi Sunak announced that new 95% mortgages will be introduced in order to allow first-time buyers to get on the property ladder with as little as a 5% deposit.

In his speech, Sunak said: “[It is] a policy that gives people who can’t afford a big deposit the chance to buy their own home.” This will make a substantial difference particularly to those living in more expensive areas, such as London. For those in the capital, it is notoriously difficult to get on the property ladder as price houses are so high.

This new Government scheme will enable mortgage lenders to offer loans of up to 95% of the value of the property, with Prime Minister, Boris Johnson, declaring he wants to 'turn Generation Rent into Generation Buy’.

This scheme will solely be available to buyers of properties costing up to £600,000. According to Rightmove, this accounts for 86% of all homes currently up for sale in the UK. The mortgages will become available from April 2021, until December 31 2022.

Iain McKenzie, CEO of The Guild, says: “The Chancellor gave the property market a double shot in the arm today, with a boost from the stamp duty holiday extension and 95% mortgages. While 95% mortgages are on the whole a positive initiative that could help first-time buyers get onto the property ladder, this lending must be responsibly targeted. Thousands of first-time buyers will be wondering if this is their chance to make the leap from a lifetime of renting to owning their own property. The Government is really looking to turn Generation Rent into Generation Buy.”

95% mortgages explained

A 95% mortgage covers 95% of a property’s value, leaving the buyer to cover the remaining 5% in the form of a deposit. This can also be referred to as a 95% LTV (loan-to-value) mortgage.

Until now, most mortgage lenders were offering up to 85% mortgages, which means buyers can now save up to a third of what they would have had to pay prior to this announcement.

Buyers will also be able to fix their initial rate for up to five years. While it's similar to the Help to Buy scheme, it's not restricted to first-time buyers or new build properties.

Is a 95% mortgage right for me?

If you are able to afford a larger deposit on your new home, you may find you have more choice when it comes to finding a mortgage with lower interest rates. However, if you are a first-time buyer or struggling to fund a larger deposit, then this is a great solution for you.

Check out our mortgage calculator to see how much you will need to pay back monthly once you’ve purchased your new home.

Are buyers with a small deposit guaranteed to get one of these deals?

Buyers will still be subject to affordability checks, so it's not a guarantee that they'll be offered one even if they have the 5% deposit. Lenders could be concerned about the potential for buyers to fall into negative equity due to the small deposit amount and uncertain financial outlook.

Why will lenders offer these mortgage deals if they had previously removed them?

They are backed by the Government, so this means the risk is reduced for the lenders.

If you’re a first-time buyer with a small deposit, or have limited equity in your home but are looking to move, these new deals could offer the helping hand you need with your property purchase.

If you’re ready to get started with your mortgage or are hoping to switch to a better mortgage deal, you can start your mortgage journey online. L&C's Mortgage Finder will compare thousands of deals from across the market to find the best one for your circumstances. And what’s more, L&C’s advice and service won’t cost you a penny.

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Looking to find a new home and make the most of the 95% mortgage scheme? View this selection of stunning properties under £600k or contact your local Guild agent today. Contact your local Guild agent today.