Is now the right time to take out a 95% LTV mortgage?

In the aftermath of the 2008 financial crisis, lenders across the UK mortgage market considerably tightened their lending criteria. One of the ways in which they did this was to ask borrowers to put down larger deposits, as a way of reducing lending risk. For many lenders, what this meant in practical terms was that they would only lend mortgages up to 90% of the total value of the property, meaning would-be homeowners would have to put down a deposit equivalent to 10% of the property value.

Despite a number of government measures intended to make 95% loan-to-value (LTV) mortgages more readily available to borrowers – under the collective banner of the Help to Buy scheme – lenders have been slow to return to offering 95% LTV mortgages. However, there are now signs that attitudes may be beginning to change.

Last month, Which? magazine reported that a number of lenders have re-entered the 95% mortgage market, with many hoping to take advantage of buyer optimism off the back of the recent abolition of stamp duty for first-time buyers purchasing properties worth up to £300,000. In fact, the total number of 95% mortgages on the market is now the highest it has been since April 2008.

The pros and cons of 95% mortgages

There is at least one clear advantage of 95% mortgages, especially to those buying property for the first time – it effectively cuts in half the minimum deposit you have to save up. That can make quite a difference: with the average UK house price at £227,871 as of March 2018, that’s the difference between having to save £22,787 and £11,393. Clearly, that has the potential to allow buyers to get on the property ladder months or years earlier than might otherwise be the case.

Taking out a 95% mortgage can have its drawbacks, however. Across the board, interest rates will typically be higher than for an equivalent 90% mortgage, so there can potentially be an advantage in biding your time and saving up the larger deposit.

High LTV mortgages also carry the risk of negative equity in the event of a downswing in the property market – if house prices drop, you could conceivably end up owing more on your mortgage than the property is worth. While that needn’t be a problem if you can sit it out and wait for prices to rise again, it could be a barrier if, for example, you wanted to move home or remortgage to a new deal with a different lender.

Managing the risk

As 95% mortgages represent a higher potential risk to the mortgage lender, many lenders have quite strict lending criteria, to ensure their exposure to risk is minimised. Most lenders will be looking for applicants with a strong credit history and no record of arrears or missed payments on other credit commitments. Lenders will also carry out an exhaustive affordability assessment, examining your income and outgoings to judge your ability to meet the mortgage repayments on an ongoing basis.

If you are considering applying for a 95% mortgage, get in touch with Just Mortgage Brokers to discuss your options. We can search the whole UK mortgage market for the best deals to match your circumstances, and may even be able to help if you have a less-than-perfect credit history. Call us today on 0808 274 9569, or use our online contact form.