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.
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.