95% Mortgages for first time buyers
A 95% mortgage allows potential homeowners to borrow 95% of the amount of capital needed to purchase a house, while only needing a deposit of 5% of the property’s value. This is beneficial for first time buyers who may have more limited funds available for their deposit.
Lenders have gradually started to offer these mortgages again, with the UK government encouraging them to do so as a boost to the housing market. This is a bonus for those looking to get onto the property ladder for the first time.
On this page, we will outline exactly what 95% mortgages are and how first time buyers can access them.
What are 95% mortgages?
A 95% mortgage allows the buyer to borrow capital of 95% of the overall amount they need to purchase a property. The buyer will only have to put down a 5% deposit towards this amount.
This allows buyers to get onto the property ladder a lot quicker. This is because they don’t have to save up as much and can buy a house with a much smaller deposit. Usually a lender would expect at least 10% as a down payment.
This is especially helpful for first time buyers who don’t already have a property to use as equity for a mortgage. A 95% mortgage is a very solid option for buyers with large outgoings or other issues that may make saving a large amount for a deposit more difficult.
The national average age of first time house buyers in the UK has risen to 32 years old. This age is over 30 in all areas of the country according to figures published by Halifax. This is compared to an average of 29 in 2011. Increasing availability of low deposit mortgages is intended to help to lower this figure in years to come.
Even with only a 5% deposit there are other expenses to consider such as:
- Solicitor fees
- Valuation fees
- Mortgage fees
- Removal fees
- Costs of any renovations/home improvements needed
Having to only put down a 5% deposit should help with the financial impact of all of these though. These additional fees can be budgeted for separately from any money saved from needing a lower deposit amount plus any other savings.
How to get a 95% mortgage
The best way to secure a 95% mortgage is to do some research – look into what mortgage options are out there. There will be large banks and smaller lenders that can offer 95% mortgages, so comparison is key to securing a good deal.
As with any mortgage, there will be differences in terms and pricing depending on individual lenders. There will also be other factors, such as fixed term vs standard variable rate (SVR) mortgage to consider. The main types of mortgages available are:
- Fixed-rate mortgage: the interest rate doesn’t change for a fixed period of time, hence the term ‘fixed-rate’. This allows for financial stability as the amount of monthly repayment is guaranteed for a set amount of time.
- Standard Variable Rate (SVR) mortgages: The interest paid on this mortgage type will be the standard base rate for that particular lender, which does not have to be the same as the Bank of England’s rate. Lenders can change the rate at their own discretion.
- Tracker mortgages: Another option with variable rate mortgages is a tracker mortgage. This tracks the Bank of England’s set interest rate and adjusts to that rate when it changes.
The first step when arranging any mortgage is deciding which of these mortgage types seems the best option. It is then a good idea to compare prices across lenders to see who has the most favourable deal.
There may be slightly less options available with a low deposit mortgage. But there should still be a variety of choices – enabling first time buyers to choose the mortgage that suits them the best.
There are more and more lenders now willing to offer 95% mortgages, so there are a lot more choices available now compared to even 12 months ago. There are certainly significantly more compared to the number available during the pandemic.
What classifies someone as a first time buyer
Anyone who has not previously owned or bought a residential property in the UK or overseas will be classed as a first time buyer. If you have only previously owned a commercial property you will still be classed as a first time buyer in terms of residential properties.
The circumstances in which the mortgage applicant would not be classed as a first time buyer are:
- Previously having bought/owned a residential property
- Someone who has owned a property before is buying on their behalf (e.g. a parent or guardian)
- They are taking out a joint mortgage with someone who has previously owned a property
- Previous inheritance of a property (regardless of whether they actually lived there)
Speak to the individual lender for more details on this, or CLICK HERE for more information about first time buyer mortgages.
How to apply for your first mortgage with a 5% deposit
The process of applying for a mortgage should be basically the same when applying for any kind of mortgage no matter the deposit amount. There can of course be variations though depending on individual lenders.
A low deposit such as 5% may limit the amount of lenders to choose from, but ultimately there should still be a variety of choice out there.
Understandably, first time buyers may be unfamiliar with the mortgage process before putting in an application. We will highlight the steps to securing a mortgage, to make this process a little clearer and easier to understand.
Here are the 10 steps to buying your first home:
- Save up the deposit (in the case of a 95% mortgage that will be 5% of the purchase price of the property)
- Search for the property
- Agree the purchase with the seller/estate agent
- Find a solicitor and mortgage adviser/mortgage brokers
- Search for the best 95% mortgage deal for first time buyers
- Submit a mortgage application
- Secure an ‘agreement in principle’ for the mortgage
- Complete a property valuation or survey
- Solicitors searches and legal process
- Receive a decision in principle/ mortgage in principle, exchange the contracts and complete the sale
For more information on the mortgage application process check out our guide on this subject HERE.
Can you get 95% mortgages for first time buyers?
YES – 95% mortgages are available to first time buyers. With a much lower deposit, they could even be considered one of the best choices. This is certain for those looking to dive into the housing market who are being limited by a lower amount of available savings.
In fact, there is a government scheme designed specifically with first time buyers in mind. We will explain this scheme in further detail below.
Government schemes for first time buyers: Government guaranteed 95% mortgages
On 1st April 2021, the UK government launched a scheme to guarantee 95% mortgages for people wishing to buy a home. This plan was announced in the Spring 2021 budget.
This is available across the UK on properties with a value of up to £600,000. This scheme is currently due to run until the end of 2022 (31st December 2022).
With this scheme, the government works with lenders to offer 95% loan-to-value (LTV) mortgages. This means the borrower only has to provide a deposit upfront that is 5% of the value of the property they wish to buy (95:5 ratio). The rest of the money needed is loaned by the bank or other lender. It is then paid back by the borrower over a fixed period of time, most often 25 years.
The government supports the lender, by assuring they will receive partial compensation if the homeowner was to stop paying for their mortgage for some reason. The lender has the option to purchase the guarantee on top of the mortgage deal.
They guarantee anything over the value of 80%. This means that if someone with a 95% mortgage “defaults” or stops paying their repayments, the government will reimburse the bank for 15% of the overall value of the mortgage. Lenders are liable for a further 5% share of the costs over the 80% threshold though. The intention of this is to try and discourage lenders from originating poor quality mortgages just so they can make a claim.
The guarantee purchased by the lender is valid for them for up to 7 years, as homeowners are less likely to default on payments after this time.
This guarantee helps to protect lenders against losses incurred in the event of repossession, if the homeowner can no longer afford to pay their mortgage.
This type of mortgage can be used to purchase either new build or existing properties. The only exclusions are that the scheme cannot be used for buy to let mortgages/second homes.
The mortgage type for this scheme to be applicable has to be a capital and repayment mortgage. Interest only mortgages are not allowed as a part of the scheme.
The UK government has made it a requirement that lenders offer a 5 year fixed-term mortgage as part of their range of deals, if wanting to take advantage of this scheme. This allows first time buyers the security of knowing their monthly payments are fixed to set amount for the initial 5 years of their mortgage.
Is it worth trying to save for a bigger deposit?
Only having to pay 5% of the cost of a property is an appealing option for any buyer, particularly first time buyers. With deposits generally being 10% or more, a 5% deposit is a guaranteed 50% decrease in savings needed for anyone who takes out this type of mortgage.
Of course, putting down a larger deposit may be beneficial financially long term as it equals having less capital to repay in the future. But being able to get onto the property ladder more quickly with only a 5% deposit is definitely an option worth considering. Those keen to invest their money sooner rather than later would definitely benefit from this mortgage type.
House prices have been increasing year on year, with this last year being no exception. The average price of a house in the UK was £281,000 in April 2022 – up £31,000 compared to last year.*
A 95% mortgage allows buyers to lock down a good deal on their mortgage sooner than other mortgages due to needing a smaller down payment. If looking at the government 95% mortgage guarantee scheme, this is currently due to end on the 31st December 2022. Any buyer wanting to take advantage of it is best to look into this and speak to lenders as soon as possible.
Pros and cons of 95% mortgages
As with any kind of mortgage, there are pros and cons to 95% mortgages. Below we will outline these to make it easier to see a clear picture of this type of mortgage – and why it can be beneficial for first time buyers.
|Less deposit needed to secure the mortgage so can save up the amount needed more quickly||More capital to repay long term as the initial deposit amount is lower than the usual expected amount|
|Government guarantee scheme is more likely to influence lenders to offer this mortgage rate as they will be compensated if borrowers default on payments||Can’t be used for buy to let or second homes – anyone looking to purchase property as an investment may need to look into alternative mortgages such as an interest only mortgage, which are popular with landlords|
|Some of the UK’s major mainstream lenders such as Barclays and HSBC have committed to offering these mortgages – meaning easier access to low deposits now than there was previously||You can only take out a capital and repayment mortgage, interest only mortgages won’t offer 5% deposit deals|
|Lenders have been told it is a requirement to offer a 5-year fixed rate if in the government guarantee scheme – financial security as borrowers are guaranteed set monthly repayments for this amount of time||The government guarantee scheme is due to run out at the end of this year, so it needs to be taken advantage of sooner rather than later. This means committing as soon as possible.|
For more information about the benefits of 95% mortgages, get in touch with a mortgage specialist such as us. We can advise on various mortgage types to help match borrowers up to the perfect lender and mortgage type for their needs.
Shared ownership for first time buyers
Another option for first time buyers is something called a shared ownership scheme. With shared ownership, it means that the buyer is only purchasing a percentage of the property whilst paying rent to a landlord on the percentage they don’t own.
With a shared ownership property, the amount of deposit you need is proportionate to the percentage of the property being bought – not the overall value.
For example, a buyer could purchase 20% of a property worth £100,000, meaning they only need a mortgage worth £20,000.
95% mortgages are often available with these arrangements, so in the above example the buyer would only need a deposit of £1000. This equals a much easier way for buyers with limited funds to get their foot in the door in terms of the housing market.
It is worth considering that a slightly higher deposit (10% or more) can be helpful to qualify for a shared ownership arrangement, as certain lenders would find that preferable. This is especially true if there are other factors at play such as bad credit. It is still very possible though to qualify with a 5% deposit if involved with the right lender.
Researching is key to finding a favourable deal. It is sensible to remember to consider factors such as interest rates and length of mortgage terms as factors in monthly repayment amounts.
Comparing prices across lenders will be the best way to find the right 95% mortgage as every lender will have different pricing and terms.
Consult a mortgage specialist for further advice on the best 95% LTV mortgages for first time buyers. We can inform about what mortgages are currently available and the terms of each option to find a suitable choice.
95% mortgages for first time buyers with bad credit
Young adults had a hard time financially during the pandemic with 11% of 18-34 year olds in the UK missing at least one regular credit payment. This could be from credit cards or other loans. This is almost 4x the 3% of over 55s that reported the same thing.**
A majority of first time buyers will fall into this age range. This means there is a definite chance of cross over between those seeking to take out their first mortgage and those who have missed credit payments in the last few years.
Credit score and previous finances will also be a factor in mortgage application approvals. Lenders will usually do a credit check before approving an application and look at documents such as bank statements. This means some buyers may be understandably concerned. This is especially true with first time buyers. Having never gone through the process of securing a mortgage before, they will most likely be unfamiliar with the process.
There are lenders out there that are more willing to offer mortgages to people with poor credit. We have taken time to research and find the best lenders for people with bad credit to access a mortgage through. These include:
- Accord Mortgages
- The Mortgage Lender
It is definitely possible for someone with bad credit to take out a mortgage. A 95% mortgage may be slightly more difficult to access, only because the lower deposit could make some lenders more wary about the likelihood of defaulting on payments.
But there will be lenders who will be willing to offer 95% mortgages to first time buyers with bad credit. It just may take some research to determine which lenders will do this and of those lenders which is offering the most favourable rates.
Any of the above providers are worth looking into and depending on individual cases, it may even be possible to secure a mortgage through a mainstream lender.
Check out our page on mortgage deals for bad credit HERE for further information.
Which lenders offer 95% mortgages for first time buyers?
Following on from the introduction of the previously mentioned government guarantee scheme, several of the UK’s biggest banks have committed to offering 95% mortgage deals to first time buyers. These lenders are:
- Lloyds Bank
With mainstream lenders taking full advantage of this scheme, it would make sense for other smaller lenders to follow suit.
This is a positive thing for first time buyers as who will undoubtedly end up with more options to choose from. This allows for comparison across providers to get the best possible deal.
Can I get a buy to let 95% mortgage?
No – if going through the government guaranteed 95% mortgage scheme, it is only possible to buy a property for yourself.
Buy to let mortgages for landlords or buying a second home are both excluded from the scheme.
Similar alternatives to 95% mortgages for first time buyers
95% mortgage deals aside, there are still other options for first time buyers to find it easier to access mortgages and get themselves on the property ladder. Two such things are:
- Help to buy scheme: There is a help to buy equity loan scheme running until 31st March 2023 where first time buyers can borrow 20% of the price of the property (40% if in London) from the government interest free for 5 years – though the price of the property you can purchase is capped to a set price depending on the specific region of the country the property is in.
- Guarantor mortgages: A guarantor mortgage allows for another person such as a parent or guardian to guarantee the mortgage to assure lenders they will pay for the repayments if the borrower is unable to do so. If a first time buyer is struggling to get approved for a mortgage, this may be a good option if they can get someone to agree to be their guarantor.
If a 95% mortgage doesn’t seem the correct choice, either of the options mentioned above could be a good alternative.
For more advice on whether a 95% mortgage is the right choice for your first home, get in touch with our expert team of mortgage specialists.
We are here to help all buyers access a great mortgage in a more efficient and streamlined way. We can advise on the mortgage deals available at the moment, and the right prices and lenders to suit the needs of a first time buyer.
*according to the Office of National Statistics (ONS)
**according to Financial Reporter UK
Below we have linked some helpful additional resources for further information on the topics discussed on this page: