95% mortgages, where you only have to have a 5% deposit, are again becoming very hard to get. In September 2022 there were 274 deals for 5% deposit mortgages on offer – in mid December this had fallen to 130.
Now in 2023 there are still very few 5% deposit offers.
The Help To Buy scheme that helped buyers with only a 5% deposit closed to new applicants in October 2022.
The government-backed mortgage guarantee scheme was going to close but on 19 December the Treasury announced that it was being extended for another year until the end of 2023. This is a small-scale scheme that helped with 24,000 purchases in 2022.
This article looks at why there are so few and the problems with them that you need to know about.
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.
Banks don’t want to risk this. The more equity you have at the start, the better safety cushion there is for the bank if house prices fall. And at the moment many experts expect house prices to fall by about 10% over the next couple of years. It is worse with new builds. These often drop in value as soon as they are sold, so a small deposit can be wiped out immediately.
And negative equity is bad for the borrower as well. It 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.
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 or flat and you may have to move in a few years because of a growing family, this could be a real problem.
95% of the value, not the price
Say you have an offer of £200,000 accepted on a house. 5% of that is £10,000, so if you have £14,000 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 £190,000, they will only lend 95% of that lower amount, which is about £180,000.
That leaves you having to find £200,000 – £180,000 = £20,000. More than you have saved.
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. And that would leave you much more stretched than you had hoped for.
Having a property valued at less than your offer isn’t unusual. It may be even more common in 2023 with some sellers being over optimistic on what theri house is worth, and lenders being cautious in case the market falls.
95% mortgages are more expensive
It’s normal to have to pay a higher interest rate when you only have a 5% deposit. Often it was about 1% more.
But the market is so uncertain at the moment that 5% deals are at very higher rates. At the time of writing this (and mortgage rates change fast so this may not be up to date), about 6% was the best on offer, and the best 10% mortgages were nearly 2% cheaper.
The difference may not sound like a lot to you. 2% extra 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 £240 a month if you only have a 5% deposit rather than a 10% 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.
The eligibility criteria are often higher 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.
If any of the following apply to you, you may find it hard to be approved with only a 5% deposit. 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.