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.