At the beginning of 2020, this article started by saying “95% mortgages are back in fashion” and pointed out how many more 95% mortgage offers there were compared to a few years ago.
That is no longer true.
In mid 2020, it is now very hard to get a mortgage with a 10% deposit. The 5% deposit offers have all vanished.
Mortgage lenders are concerned that house prices may fall for the next year or two. Even a small fall will leave someone with a 95% mortgage in negative equity.
That is bad news for many first-time buyers, or people desperate to trade up to a larger house.
I will leave the rest of this article looking at 95% mortgages and what you need to be careful about with them – at some point these offers may return.
95% of the value, not the price
Say you have an offer of £160,000 accepted on a house. 5% of that is £8,000, so if you have £10,000 saved up for a deposit you may think that’s plenty… That’s not how it works.
Mortgage lenders call these mortgages “95% Loan-to-Value“. If the lender’s survey produces a valuation of £155,000, they will only lend 95% of that lower amount, which is £147,250.
That leaves you having to find £160,000 – £147,250 = £12,750.
Either you are going to have to go back to the seller and ask for the price to be cut (and risk losing the house) or you have to find another few thousand. leaving you much more stretched than you had hoped for.
This is happening more often. In 2018 it was reported:
Mortgage brokers are reporting a significant rise in these “down valuations”. One firm, Enness, said 70% of its clients’ applications were being down valued, against 20% a year ago.
95% mortgages are more expensive
As a rough guide, you are likely to pay about 1% more interest on a 95% mortgage than a 90% mortgage. Remember the rates you may be eligible for will depend on a lot of other factors, not just your deposit size, and that any fees charged are also important.
1% may not sound like a lot, but it adds up as most of your monthly repayments on a mortgage are interest. On a £150,000 mortgage, you may be paying an extra £120 a month if you only have a 5% deposit.
Negative equity isn’t far away
The biggest risk of 95% mortgages is falling house prices. Only a small fall will mean that you owe the bank more than your house is worth – this is called being in negative equity.
Negative equity can make it very difficult for you to move house or get a new fixed rate deal when your first one ends.
If you know you will be in the house for a long while you may not care about this – over a very long while house prices do usually go up. But if this is a starter house and you are hoping in a few years to move because you will have more children, or they will get older and want their own rooms, being trapped by negative equity in a house that is too small can be a very difficult situation.
It’s harder to be accepted for a 95% mortgage
For lenders, negative equity means if you have problems and get mortgage arrears they would not be able to get all their money back by repossessing your house. As a result, they charge more for these mortgages (see the previous point) and are also extra fussy about your current credit record and whether you can afford these higher payments.
If any of the following situations apply to you, talk to a mortgage broker, don’t apply directly to a lender and risk being rejected:
- your credit record isn’t squeaky clean;
- you have a lot of current debt (see Can I get a mortgage with debts? for more details); or
- you are borrowing a lot in relation to your income.
Improving your situation with a 95% mortgage
Once you have a 95% mortgage, the way to minimise the chance of future problems is to overpay the mortgage so that your equity increases faster. See this mortgage overpayment calculator for how much difference this can make. Then when your first fixed rate ends, you should be able to get a new fix at a much better rate.
It can feel very slow at the start, but now, when interest rates are low, is the best time to be doing this. Every £100 you can overpay will make your life much easier when interest rates start to rise.
You can overpay many fixed-rate mortgages by a small amount – find out what that is. If you can’t overpay yours, you can open a savings account which you will think of as just for your mortgage and then use this to reduce your mortgage at the end of the fixed-rate term before you apply for another one.