95% mortgages are now widely available from major banks and building societies, meaning you don’t have to save up such a big deposit to buy your own home.
If saving up a 10% deposit for a home feels like an insurmountable task, help is at hand. The mortgage guarantee scheme means you can buy a home with a 5% deposit and borrow the remaining 95%.
How does the mortgage guarantee scheme work?
The mortgage guarantee scheme is designed to help would-be homeowners with smaller deposits step onto - or climb up - the property ladder.
It means you only need to save up a 5% deposit to buy a home, as you can borrow the remaining 95% of the property’s value.
Because the scheme is government-backed, more lenders are now offering 95% mortgages.
And here’s the science bit as to why: it’s because the government guarantees the portion of the loan that’s over 80% for lenders, so they’ll cover some of the 15% shortfall if you default on your payments.
Interested? The scheme is open to new applications until 31 December, 2022.
Who is eligible for the mortgage guarantee scheme?
First-time buyers and home-movers across the UK are all eligible for the mortgage guarantee scheme, as long as you’re buying the home to live in yourself.
You can buy a home up to the value of £600,000 with the scheme.
And it must be bought with a repayment mortgage, rather than an interest-only one.
A repayment mortgage means you’re actually paying down the loan over time, whereas interest-only means you’re only paying the interest on the loan, so the amount borrowed remains the same.
The mortgage you apply for must be between 91% to 95% of the value of property you’re buying.
So for a £200,000 property, your deposit would need to be between 5% (£10,000) and 9% £18,000).
As with most other mortgages, you have complete freedom to choose what style of home you’d like to buy using the scheme, be that traditional or new-build.
Unlike with Help to Buy, the government isn’t stating that the scheme only applies to new-builds.
The property can’t be used for buy-to-let and it must be bought personally, rather than through a company.
As with any mortgage, the usual financial and affordability checks will be made when you apply.
The banks and building societies currently offering 95% mortgages
The major high street banks and building societies are all now offering 95% mortgages, including:
- Royal Bank of Scotland
- Yorkshire Building Society
- Skipton Building Society
- Leeds Building Society
- Virgin Money
Some, like Yorkshire Building Society, started offering them before the government’s guarantee scheme kicked in on April 1, 2021.
Are interest rates higher for 95% mortgages?
Yes. Usually, the larger the loan-to-value (LTV) ratio for the mortgage, the higher the interest rate you'll pay on the loan. That means 95% mortgages will generally come with a higher interest rate than a 90% mortgage, for example.
That’s because you’re borrowing more of the property’s total value with a 95% mortgage than you would be with a 90% mortgage. This makes the loan a slightly riskier proposition for lenders, hence the higher interest rates.
Fixed rates on 95% mortgages currently range from around 2.69% to around 4.39%, so it’s worth shopping around.
The government has stated that lenders must also include five-year fixed rates as part of their offering, so that borrowers know exactly what they’re outgoings will be for a certain length of time. That means more security for borrowers and is good news.
Is it risky to take out a 95% mortgage?
95% mortgages are often a popular choice among buyers when prices are rising fast. That's because it can be better to get on the property ladder sooner, rather than wait until you've got a 10% deposit together.
There are some risks to taking out a 95% mortgage, but for many borrowers, the fact they can secure a home before the prices go out of their reach is enough to mitigate many of them.
There's a greater risk of negative equity
That's when your home goes down in value, so you owe more on the mortgage than the property's worth.
As you pay off more of the mortgage and the percentage of the property you own increases, there's less chance of this happening.
It may be harder to remortgage
Until you own a greater percentage stake in your property, it may be hard to change mortgages to a more competitive rate.
Once your LTV rate increases from 5% to 10% or more, this will become easier.
Higher interest rates and lending charges
Mortgage providers tend to charge more for their loans when you have a smaller deposit.
The lender uses the higher lending charges to take out insurance on your loan, otherwise known as a mortgage indemnity guarantee (MIG).
This is to protect the lender, not the borrower, in case they’re forced to repossess your home and end up selling it at a loss.