First Time Buyer 95% LTV Mortgages: Everything You Need to Know
As a first-time buyer, getting on the property ladder can feel like challenge, particularly when it comes to saving for a deposit.
If you’re struggling to save up a large deposit, a 95% loan-to-value (LTV) mortgage could be an option for you.
This type of mortgage allows you to borrow up to 95% of the value of the property, meaning you only need a 5% deposit.
What is a 95% LTV Mortgage?
A 95% LTV mortgage, also referred to as a 5% deposit mortgage, enables you to borrow 95% of the property’s value.
This means that you only need to save a deposit of 5%. For example, if you’re purchasing a property worth £200,000, a 95% LTV mortgage would allow you to borrow £190,000, with the remaining £10,000 coming from your deposit.
This type of mortgage can be particularly attractive to first-time buyers, as the lower deposit requirement means you can get onto the property ladder more quickly.
However, it’s important to weigh the benefits and drawbacks to determine if it’s the right option for you.
Who Can Get a 95% LTV Mortgage?
95% LTV mortgages are widely available to first-time buyers, and some lenders offer them as part of their standard mortgage product range.
To qualify, you’ll need to meet the lender’s eligibility criteria, which typically include factors such as:
- A good credit score
- Proof of stable income
- Demonstrating that you can afford the monthly repayments
- Passing the lender’s affordability checks
At Kerr & Watson, we can help you assess your financial situation and determine which lenders are most likely to approve your mortgage application. We also offer valuable advice on improving your eligibility if necessary.
Find out Your Options
Advantages of a 95% LTV Mortgage
Opting for a 95% mortgage comes with several advantages for first-time buyers:
- Low Deposit Requirement: With only a 5% deposit needed, you can step onto the property ladder faster than if you had to save a larger amount.
- Access to Government Schemes: There are several government-backed schemes, such as the Mortgage Guarantee Scheme, designed to encourage lenders to offer 95% mortgages.
- Start Building Equity: With a mortgage in place, you can begin building equity in your property. Over time, as property values potentially rise and your mortgage balance decreases, you may be able to remortgage to a better deal in the future.
Disadvantages of a 95% LTV Mortgage
While there are notable advantages, it’s important to also consider the potential downsides:
- Higher Interest Rates: 95% mortgages often come with higher interest rates compared to lower LTV mortgages, meaning your monthly repayments could be more expensive. You can utilise our mortgage calculators to get an idea of these.
- Risk of Negative Equity: If property prices fall, you may end up in a situation where your home is worth less than the outstanding mortgage balance. This could make it difficult to sell or remortgage.
- Limited Product Availability: While there are lenders who offer 95% mortgages, the range of products available is smaller compared to mortgages with higher deposits.
At Kerr & Watson, our expert advisers can guide you through the risks and benefits, helping you make an informed decision that suits your financial situation.
Government Support for 95% Mortgages
The UK Government introduced the Mortgage Guarantee Scheme to encourage lenders to offer 95% mortgages. Under this scheme, the government acts as a guarantor for a portion of the mortgage, reducing the lender’s risk.
It’s worth noting that this scheme is due to end in June 2025.
Alternatives to a 95% LTV Mortgage
While a 95% LTV mortgage might seem like the easiest route to buying a home, there are several alternatives that may better suit your circumstances:
- Shared Ownership: With the Shared Ownership scheme, you purchase a portion of the property and pay rent on the remaining part. This can make homeownership more affordable if you have a small deposit.
- Help to Buy ISA: Although now closed in England, Scotland, and Northern Ireland, the Help to Buy ISA is still available in Wales until 2025. It enables you to boost your deposit with a government equity loan, allowing you to borrow a lower LTV amount.
- Guarantor Mortgages: With a guarantor mortgage, a family member can help you secure the loan by offering their property or savings as collateral.
Each route has pros and cons so you should always speak with a professional mortgage adviser who can guide you.
Fixed-Rate vs Variable-Rate Mortgages
When choosing a 95% mortgage, you’ll need to decide between a fixed-rate or variable-rate product. Here’s a quick overview of the differences:
- Fixed-Rate Mortgages: With a fixed-rate mortgage, your interest rate remains the same for a set period, typically 2-5 years. This gives you the certainty of knowing exactly how much your monthly repayments will be.
- Variable-Rate Mortgages: A variable-rate mortgage may see your payments fluctuate, depending on changes in interest rates. This can offer savings if rates fall, but your repayments could increase if rates rise.
Different schemes suit different people and situations so speak with a mortgage adviser to establish which is best for you.
Building Equity and Moving to a Lower LTV
If you take out a 95% LTV mortgage, think of it as a stepping stone. Your initial focus should be on building equity in your home as quickly as your budget allows. For example, making occasional overpayments (if permitted by your lender) or channeling any pay rises or bonuses into your mortgage can chip away at the balance.
As property values hopefully rise over time and your outstanding loan decreases, your loan-to-value ratio will improve. After a few years, you could find yourself at 90% or 85% LTV, at which point you’ll likely have access to mortgages with better interest rates. Plan to remortgage when your fixed term ends – by then you might qualify for a lower-rate deal thanks to your reduced LTV. In this way, a 95% mortgage can be a short-term solution to get you on the property ladder, with a view to refinancing to a more favourable deal once you’ve built up equity.
Conclusion
A 95% LTV mortgage can be a good option for first-time buyers looking to purchase a home with a smaller deposit.
While it comes with higher interest rates and certain risks, it also offers the opportunity to get on the property ladder sooner and begin building equity.
At Kerr & Watson, we specialise in helping first-time buyers. Our advisers are here to provide expert guidance, ensuring you find the best deal to suit your financial situation.
Whether you’re looking for a 95% mortgage or exploring any other alternatives, we’re here to help you every step of the way.
