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95% mortgages vanished with the pandemic
At the beginning of 2020, this article started by saying “95% mortgages are back in fashion“. It pointed out many more 95% mortgage offers there were compared to a few years ago. The interest rates were a bit higher than a mortgage with a 10%5 or greater deposit.
But with the pandemic, mortgage lenders ran scared, 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.
By mid 2020, 5% deposit offers had all disappeared – it was even hard to get a mortgage with a 10% deposit. Bad news for many first-time buyers, or people desperate to trade up to a larger house.
In the March 2021 budget, a new government guarantee for lenders was announced.
The new government guarantee scheme
The “guarantee” being offered is to the lender, not to the buyer.
The government will only provide the guarantee to the lender for properties under £600,000, for first time buyers and not for buy-to-let properties.
To the first time buyer this looks like a normal mortgage. You apply to the lender in the same way as any other mortgage. Any mortgage broker will be able to talk about these loans to you.
This is completely different from the Help To Buy scheme which only applies to new houses and where the government owns part of your house
Lloyds, NatWest, Santander, Barclays and HSBC have said they will offer the new government-backed 95% mortgages from April 2021.
Of the major lenders, only Nationwide has said it won’t participate.
Halifax and Barclays however will not offer the new mortgages on new-build properties. These often drop in value as soon as they are sold, so a tiny deposit can be wiped out immediately.
Another boost for house prices – but good for you personally?
The new 95% mortgages will make it easier for first time buyers. But there were no measures in the budget to increase the supply of houses in general or of “affordable homes”.
So more people will be competing to buy the same number of houses… As a result it is likely that house prices will rise.
The market for first-time buyers is made harder at the moment by the fact that a lot of flats are currently unmortgageable because of cladding and other fire safety issues. Obviously, you have to avoid those, but this will be pushing up prices for other first-time buyer properties.
House price rises benefit people who already own property and especially older people who do not need to move to a larger house. They don’t help first-time buyers at all!
But is a 95% mortgage right for you? They may be a very bad idea for the country as a whole, but your choice should depend on what works for your family.
But there are some points you need to think hard about.
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 isn’t unusual, especially if market prices are rising.
The house market in 2021 can vary a lot between different parts of the country. If you are in an area where prices are being bid up, you may feel happy with the offer you have had accepted, but the valuation your mortgage lender makes may say it is not worth that much.
95% mortgages are more expensive
In April 2021 NatWest is offering a two-year fixed rate at 3.90% and a five-year fixed rate at 4.04%.
Barclays is charging slightly more – a two-year fix at 3.99% and a five-year fix at 4.09%.
These are higher than the rates you could get with a 10% deposit, especially if you want the safety of a five year fix.
The difference may not sound like a lot to you. 1% may sound small! But it adds up as most of your monthly repayments on a mortgage are interest for a lot of years at the start. On a £150,000 mortgage, you may be paying an extra £120 a month if you only have a 5% deposit.
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. A good broker can help you compare different options.
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 being trapped by negative equity in a house that is too small can be a very difficult situation. So if this is a small starter house and expect to have to move in a few years because of a growing family, this could be a real problem.
It is worse with new builds, as these tend to drop in value straight away.
It may still be 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 and are also extra fussy about your current credit record and whether you can afford these higher payments.
Here the new government guarantee may help a bit, but many lenders will still be keen to avoid future problem if your application looks problematic.
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 most 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.
35-40 year mortgages – be careful!
Will defaults stop me getting a mortgage?
Save a deposit or pay off debt – your options
Tyler bailey says
I have just defaulted on a credit card (the worst time) as I have put my house up for sale and actively searching for a new one.
I am looking at a property of 270-280k with a 150k deposit from the sale of a property which I do not own. This is where it gets complicated.
My sister helped bought me a house 10 years ago when I applied for a mortage and was turned down for this house and the mortgage is in her name however I pay it. She was so kind to do this and still in agreement (thankfully) that the housw belongs to me unofficially. I am hoping to loan the remainder from a mortgage of 140-150k.
I have just been turned down by a Mortage broker due to my default and over spending on a second credit card. I did have a cj however settled in 2012 and all this is a burden of my divorce.
I don’t have the funds yet to settle this account however will do as soon as I get some funds and eager to move out.
Do you think my sister )as she suggested) could move the existing mortgage to the new home I am looking at or could I apply as a joint applicant ? what can I do in my situation? Any help would be great
Many thanks
Sara (Debt Camel) says
How much is the current house worth? How large is the current mortgage?
alex says
i have just unsuccessfully attempted an equity release lifetime mortgage on my property in order to leave me debt free and remainer of my mortgage £25000 free .i was refused on the grounds that no lender would grant a lifetime mortgage because the property is of airey house construction basicly a pre fab house . i knew at the time that a mortgage was ni impossible then low and behold my bank approached me and enquired why i had not bought my council house , they proceeded to give me a mortgage on it and in later years when i had a mental and physical breakdown and accumalated massive debts they gave me a remortgage to the tune of 92000 pounds , i am now starting to struggle also on the remortgage i was advised to take a 5 year fixed rate of 6.6% when the rates plummeted , useless arnt i , any advice welcome ,thanks
S says
Hi Sara,
Apologies if I’m posting this in the correct place, but I’m just wondering if you are aware if anyone has had any success fighting FIRST PLUS (2nd Mortgage) with regard to their extortionate interest rates?? Is it possible to make a complaint of “Irresponsible Lending” against Barclays for offering 125% LTV Mortgages and charging interest way above the BOE Base Rate?
Thanks S
Sara (Debt Camel) says
I am not aware of any cases. When did you take the loan?
S says
Hi Sara,
I took the loan approx 10 years ago now and sadly still owe around the same amount I borrowed?
Thanks S
Judy B says
My question is mainly around getting a mortgage. I still have a CCJ /five defaults – all paid off, the defaults mainly drop off over the next 12 months and were all for amounts under £2k, a CCJ for £900 drops off in Feb 2021 and a larger default (for an 11k debt settled for 6k) drops off in March 2021. Its horrendous still for me to look at how badly I managed my money. I am looking to buy a property in 2021 when the marks fall off my report and using the next two years to rebuild my credit file. I have 5 credit cards all with limits of 200 – 500, but looking to increase them to 1k + over coming years. I try to use them a little each month / pay off balance etc. I never use my 1k overdraft either. I am keen to get on the property ladder, currently earn a decent income (50k this year as self employed) + my deposit will be c.25 – 35k min. by summer 2021. But, I will still have a small default with Virgin Media for 80 quid that comes off in Sept 2022. Will this default scupper my chances of a mortgage? Is there anything I can do to combat it/ compensate for this? I will also have account history of pay day loans (which I used btw 2012-2014 – i have had some refunds etc) but paid off two loans in 2016/17 so will still be on my record in 2021. Any tips on what I can do over the next 2 years would be massively appreciated.
Sara (Debt Camel) says
Summer 21 looks like a good target. All the defaults except one will be gone, the CCJ crucially will have gone, and the only remaining default will be small, old and repaid for more than a year. And your payday borrowing will be well in the past. And you will have a deposit saved.
If you go through a mortgage broker, I think you should be fine.
It may be horrendous to look back but give yourself credit for turning round your finances so much!
Any tips – 5 small credit cards is a lot. I would think about closing the two with the highest interest rate and getting the limits increased on the other three.
No more credit applications obviously. If you close any accounts with DDS – eg utilities or mobiles – make sure you don’t cancel the DD until you have definitely had the final bill. It’s better to leave them an extra couple of months than end up with a default because you cancelled too soon. Be extra careful if you are moving that everyone knows your new address, including DVLA.
Guppy says
If you have a bad credit report can you still use Help to Buy scheme
Sara (Debt Camel) says
Yes but you have to find a mortgage lender that will lend to you.
Amy says
Hi Sara I am looking to get a mortgage this year and maybe a bit sooner now with the 5% deposits, I have a couple of defaults which will be over 3 years old and paid off. My question is I have quite a few maybe 8 really old catalogues from around 2008 which were sold to lowell and I pay them every month. The arrangement has been set up for years and I pay £5 to each one every month so these will show on my bank statement and 3 of them do show on my credit report for some reason. “ just as active accounts not defaults. Would this matter when I have to provide bank statements when I apply for a mortgage? That it shows I pay £40 to Lowell each month? I could try and pay these off but this would lower my deposit and I would rather try get a house and then pay these after as I am desperate to move. Thanks
Sara (Debt Camel) says
So first no-one knows what the criteria will be for the new 95% government-guaranteed mortgages but the lenders are likely to all be banks and building societies, not “bad credit” lenders.
But for “normal” mortgages, not “bad credit” mortgages, unpaid defaulted debts or a payment arrangement in place are a very big problem.
Three of these show on your credit record. You can try to get them off your credit record by asking the original lender, not Lowell, to add a default date more than 6 years ago. If they do this, lowell has to add the same old default date and the debts will drop off your credit record. This is well worth trying, see https://debtcamel.co.uk/debt-default-date/ and you should start as soon as possible.
But the ones on your bank statements are still a problem as the mortgage lender will see Lowell as the payee. These you need to get settled as soon as possible. Ideally you want these settled 6 months before you apply for a mortgage so if the lender asks for 6 months statements they won’t be visible.
You can try to settle the debts partially by offering a lower settlement amount. See https://debtcamel.co.uk/debt-options/less-common/full-final/. Doing this will NOT cause the debt to reappear on your credit record.
You can also ask for the CCA agreements for the debts. See https://debtcamel.co.uk/ask-cca-agreement-for-debt/. You as Lowell, not the original creditor. If Lowell can’t produce them – which may well be the case for several of these old debts, then you can simply stop paying them if they aren’t on your credit record – you cannot be taken to court. This will give you more money for the deposit or indeed for paying off the debts where a CCA agreement cannot be produced.
I am afraid this is all going to take some time. but I am not optimistic about your chance of getting a 95% mortgage until you tackle these debts, getting them off your credit record and once they are off, either settling them or stopping paying when a CCA agreement cannot be produced.
Amy says
Ok thank you, I will have a look at the CCA arrangement. I have asked Lowell a few times if they could offer a discount but it is only 10% and a couple of them are quite high which would be an issue. I did try last year and go down the default route but it didn’t work and I would be a bit scared in case a default was added for any reason and I have worked hard for 3 years to clean up my score. The only other option I was thinking would be to cancel the direct debit and try and set up a cash payment via barcode however I am not sure they would do this and pay the 3 showing on my credit file. I did speak to Lowell last year about these however was told they would stay on my report as active until they were paid off. Is this correct? Even though the catalogue was closed years ago?
Sara (Debt Camel) says
I did try last year and go down the default route but it didn’t work
you asked the original lenders?
How long ago did Lowell buy these debts?
I did speak to Lowell last year about these however was told they would stay on my report as active until they were paid off. Is this correct? Even though the catalogue was closed years ago?
if there is no default, they stay for 6 years after the debt is settled.
Sara (Debt Camel) says
It is a pity you didn’t escalate the JD Williams account – if the complaint was more than 6 months ago it’s too late to do this now.
You can ask o2 to add a default.
try and set up a cash payment via barcode
That may not work. The mortgage lender may ask who the payments are to.
Basically if you can’t get a default added, you need to settle the debts still showing asap. Some mortgage lenders will be happy if problem debts are settled over a year before a mortgage application.
Where the debt has dropped off, you have more time. you can ask for the CCA agreement and stop paying if it can’t be produced. And settle them if it can. These only have to be done 6 months before an application as mortgage lenders usually only ask for bank statements going back 6 months.
BUT all of this is just general rule of thumb advice. We don’t know yet what banks will want for these 95% mortgages. It makes sense to clean up and settle things as fast as possible though.
Karen says
Hi Sarah,
I know we are all waiting for more details on the 95% mortgages,hopefully they will be a bit more favourable to first time buyers in terms of the amount they will be willing to lend given the house prices nowadays….
We are buying a house and we’ve agreed a price, now just waiting for the 95% deals to come out. Of course I am ridiculously worried if we will be able to get the mortgage. At £280k price will a £266k mortgage be doable in your opinion? We are both working full time with an income over 60k and our credit scores are excellent, we don’t have anything on finance. I do have one credit card with around £700 on it out of £1500, no late payments and I pay double the minimum monthly on it. Only had it to build a credit score as I had none…
We are also prepared to either top up the deposit or go for a 90%ltv mortgage should we need to. But I guess my question is, does having a 10% increase your chance of a mortgage when we are only talking about 5% difference… I know the rates are not much different between the two and I doubd the criteria will be?
Thanks,
Karen
Sara (Debt Camel) says
If you have a 10% deposit, I think you should be talking to a broker now about your options. 10% mortgages may be considerably cheaper than 5% and may be easier to obtain.
Also it’s good to clear that credit card so you have a zero balance, that is best for your credit score and stops you from wasting money on interest. Then you buy something small once a month, say a tank of petrol and pay it off in full every month.
Z powet says
Hi
We are saving £10,000 for a deposit so we can try and get a 95% mortgage early next year we have 2 loans one would be paid off a year in November it’s a £188 a month so we’re trying to save as well to pay it off this year the other is for £294 a month we also have about £7,500 in credit cards which are near there max when we apply for a mortgage would they knock this dept off the amount we are trying to borrow so we can only borrow less. The reason I’m asking is we earn about £40,000 between us and house prices are expensive where we live 4.5 times our wages is £180,000 and there’s few and far between houses near us at that price
Sara (Debt Camel) says
when will the other loan finish?
Are you still using the credit cards? What are your minimum payments each month and are you paying more?
Z powet says
Hi thank you for replying, we have 3 years in December left on the loan. We have £117 min payment on the £6000 credit card and £47min on the other I do spend occasionally on them but trying hardest not to and we do try to pay more than minimum payment
Sara (Debt Camel) says
So the best advice to totally stop using the cards. And to set up a standing order so each card for more than the currrent minimum. Do you think you could manage £130 and £50? These will mean the balances are clearly dropping. £6000 is a lot – if you can ever make an extra payment in a good month to it, even just £30, in addition to the standing order, that will really help chip away at it.
Getting a mortgage next year looks very tight. You also have the legal costs and moving costs.
Z powet says
Hi yes that is good advise thank you with the standing orders and yes we do try to pay a bit more when we can thank you for your advise. I know it is but if we aim in these directions you haven’t said no so that’s makes me feel better that we’re heading in the right direction and can see where we are next year thank you