The 95% mortgage scheme (sometimes referred to as a 95% LTV mortgage) allows a home buyer to purchase a home with a deposit of just 5%. The aim of the scheme is to make home ownership more accessible to people with lower incomes, and to those hoping to get onto the property ladder sooner.
Who is the scheme available for?
Unlike many home buying schemes that are only available to select groups (e.g. First Time Buyers), 95% mortgages are open to anyone buying a home.
Even though the government should shoulder some of the cost to lenders if repayments aren’t met, lenders offering 95% mortgages will still try to avoid this. So, they will do the usual checks to ensure buyers using the scheme can make regular repayments. This means looking for a regular income and sufficient savings, as well as a good credit score.
What kind of property can you buy?
Not every property on the market will be eligible for a 95% mortgage. The price cap on the scheme currently stands at £600,000. Any house worth more than this cannot be purchased with a 95% mortgage.
This ensures that the scheme is not taken advantage of by those who don’t need it. For instance, if you can afford a 5% deposit on a house worth more than £600,000, then you could also reasonably afford a higher deposit on a house worth less than that, therefore you don’t need this scheme to help you get on the ladder.
How to use the scheme
A 95% mortgage operates the same as any other mortgage. It will be offered by mortgage lenders as one of their 5-year fixed-rate LTV mortgages. You can apply for the mortgage like any other with the lender.
To help you find the lenders who offer 95% mortgages, it’s important to hire a mortgage broker. They can scour the market for the best lender to suit your needs. Brokers can also be useful in answering any other questions you have about the moving/mortgage process. Remember, they are paid to get you the best mortgage you can get, so they will always give you their best advice.
What are the benefits of the scheme?
The main benefit of the mortgage scheme is that people with less money to put towards a house deposit will be able to get on the property ladder. This is especially important in the current economic climate, where many people may be experiencing a lowering of their income due to the Covid-19 pandemic’s effect on businesses.
Under the terms of the scheme, participating lenders need to offer the mortgage as 5-year fixed term. The benefit of this is that anyone who gets this mortgage knows that their monthly repayments will not increase for the first five years. This is particularly important for those who are pressed financially.
Government involvement in the scheme also increases the likelihood of lenders offering a mortgage. Usually, lenders are nervous about lending to someone with less stable finances, as they may not get their money back. However, the government has promised lenders that they will recoup some of the costs if repayments are not met, or if a house is repossessed (but does not make back what was owed in sale). This safety net means they will be more willing to offer a mortgage to someone who may not usually be eligible.
Remember that they will still want as much security as possible and won’t want to have to fall back on the government. So, make sure your finances and income are as solid as they can be before you apply.
Are there drawbacks?
A major problem that may be caused by the scheme is that house prices may end up falling once the scheme ends, leaving buyers that bought through the scheme at risk of ending up in negative equity with their property. This could happen because the government is propping up the market with the scheme, leading to it potentially falling back down once their assistance is no longer around.
While the scheme is in place, there could also be the opposite effect, with prices rising due to the demand from smaller deposits making it easier to buy. While this is good for the market, it could mean that 5% deposits will cost more than usual, leaving some people still unable to afford them.
Furthermore, although the 95% mortgages offered through this scheme must be fixed rate, there are currently no rules as to what this fixed rate must be. So, a drawback of such a mortgage is that you may find your monthly repayments being higher than those of a regular mortgage, as lenders seek to get their money back.
How long is the scheme running for?
The 95% mortgage scheme will run until 31st December 2022. However there is set to be a review closer to that time, meaning the scheme may be extended.
It is also important to be aware that even after the scheme ends, some lenders will still offer 95% mortgages (as they did before). But they will be less common as they will no longer have government backing.