Published 16 Nov 2017
Mortgages That Require Just 5% Deposit
Back in September 2015 Santander announced that they would start lending up to 95% loan-to-value (LTV) mortgages without the need or assistance of the Help to Buy scheme. Since then, many other high-street lenders have followed suit, offering mortgages with only 5% deposit; allowing many first-time buyers to get onto the property ladder.
We have spoken to Jas Bola from Hillcrest Property Solutions - one of Peabody's approved Mortgage Advisers - to find out what 5% mortgages mean to property buyers.
What is the 95% mortgage?
95% loan-to-value (LTV) mortgage is where you are putting down 5% in deposit on the value of the share that you are purchasing and the rest will be covered by the mortgage or the loan.
Who is eligible for the 95% LTV mortgage?
These products are available to any purchaser who is able to provide 5% deposit on the property they wish to purchase - subject to necessary checks such as the credit score. This offer is obviously very attractive to first time buyers as these buyers traditionally have struggled to save up higher levels of deposits, especially in areas of high property prices, such as London and its suburbs.
What are the pros and cons of getting a 5% mortgage?
The pros are quite obvious - 95% LTV mortgages make properties more accessible to people who otherwise would have struggled to lay down a deposit of 10% or more. It has to be remembered, though, that the higher the deposit you are able to put down, the better the mortgage deal you are likely to get. Buyers relying on 5% mortgage deals will have fewer products to choose from and may get a worse deal on their mortgage in the longer run. In other words, you risk getting a mortgage that is quite expensive and that may cause you to struggle further down the line.
Are there any restrictions on the 5% mortgage deals?
There may be restrictions but they are likely to vary from one lender to another. For example, some lenders restrict the amount that they will lend up to £150,000 - which in practice means that, in London at least, only Shared Ownership properties would qualify.
This is why it is crucial to shop around and, most importantly, to get good advice before you commit to a particular product.
What should I be looking for in a 95% LTV mortgage deal?
The rates of repayment are the most important thing to look at. In my experience, most lenders that offer 95% LTV products offer fixed or discounted rates of repayment.
Fixed rate does what it says on the tin – you know what you are paying on a monthly basis. With a fixed rate you are tied into a contract in a similar way you would with a mobile phone contract. You know exactly what you are paying but you may have to pay a penalty if you want to redeem your mortgage before the agreed period of time.
Another option are discounted rate products. They are set at a discount below the lender's variable rate.
The difference is that while back in the day, my parents' generation for example, would be able to shop around for a variable rate. In the modern market, most lenders will choose to tie you in with a fixed rate product for a period of time and only once that time is up will you be able to shop around for a more economical standard variable rate.
Standard variable rate
The standard variable rate is the rate offered by the individual lender, once your fixed rate has come to an end. That would usually be after two, three or five years depending on the product.
Each lender might have their own variation on the product, but variable rates are tied to the Bank of England base rate. For example, someone like Barclays-Woolwich has a tracker rate, which is 3.75%, and that added to the Bank of England base rate - currently at 0.5% - would produce their standard variable rate of 4.25%.
What if I can only afford to put down 5% deposit - will I be tied to an unfavourable rate for life?
Not necessarily. That's why it's so important to have good advice from the start. 95% LTV mortgages are a short term solution. Because these rates are going to be higher, you don’t want to be tied in for five years on a higher rate. You should try to go for a short period - for example for two years – make overpayments if you are able to do that, and then move to a lower-priced product by way of remortgaging.
Hopefully by then you will be able to pay a higher deposit - say 10% rather than 5%, which means that you will be able to look at other lenders on the market.
This is why it's so important to see a mortgage broker who will look at your circumstances, your deposit and your income, and will ultimately work out which a mortgage lender will give you the best mortgage deal based on your affordability.
What are currently the best 95% mortgage deals for Shared Ownership?
At the moment, Leeds Building Society normally comes top with their rates. But these things change quite rapidly with new products being launched - it's always better to take a bespoke approach and find a lender that is best for you.
Would you advise buyers to go for 5% deposit deals?
Putting down a large deposit is always better. But in this market of constantly rising property prices - in London at least - in my opinion, 95% LVT products in conjunction with shared ownership is an excellent alternative to assist first time buyers climb the property ladder in an affordable manner.