90% and 95% Mortgages: How do they work?
In this guide:
- How do 95% and 90% mortgages work?
- What is a 95% mortgage?
- The advantages and disadvantages of 95% mortgages
- What is a 90% mortgage?
- The advantages and disadvantages of 90% mortgages
- Should you continue to save for a larger deposit?
- The mortgage guarantee scheme explained
- Help to Buy explained
How do 95% and 90% mortgages work?
With a 95% or 90% mortgage, you only need to put down a deposit of either 5% or 10% of the property value and borrow the remaining 95% or 90%.
These mortgages are often described as having a 95% or 90% LTV. This stands for ‘loan to value’ and refers to the percentage of the property’s value that you’re borrowing.
This type of mortgage often appeals to those who want to get onto the property ladder but would struggle to save a bigger deposit.
What is a 95% mortgage?
When you take out a 95% LTV mortgage, you put down a deposit of 5% of the property value and borrow the remaining 95%.
For example, if you were buying a property valued at £250,000, you’d put down a deposit of £12,500 (5% of £250,000) and you’d take out a mortgage for the remaining £237,500 (95% of £250,000).
The advantages and disadvantages of 95% mortgagesThe main advantage of a 95% mortgage is that it can make it easier to buy a property.
However, mortgage rates are usually higher than for a mortgage that requires a bigger deposit. This is because lenders are taking on a higher level of risk.
There’s also the possibility that if property prices fall, you could end up owing more than the property is worth. This is known as ‘negative equity’.
Having a 95% mortgage can also make it harder to remortgage, as you’ll typically only have access to a relatively limited range of remortgage deals if you only have a small proportion of equity in your home.
What is a 90% mortgage?With a 90% LTV mortgage, you put down a deposit for 10% of the property value and take out a mortgage for the remaining 90%.
For example, if you’re buying a property costing £250,000, you’d put down a deposit of £25,000 (10% of £250,000) and take out a mortgage for the remaining £225,000 (90% of £250,000).
The advantages and disadvantages of 90% mortgages
A 90% mortgage offers similar advantages and disadvantages to that of a 95% mortgage.
For example, a 90% mortgage might make it easier and faster for you to get onto the property ladder, as you’ll only need to save 10% of the property value as a deposit.
However, you’ll typically have to pay higher mortgage rates than someone with a larger deposit.
As with a 95% mortgage, there’s also the risk that, if house prices fall in the future, you could end up in a position of negative equity, where you owe more than the property is worth.
Should you continue to save for a larger deposit?
The bigger the deposit you can save, the wider the range of mortgage options you’ll be able to choose from.
Lenders typically reserve their most competitive rates for those with larger deposits, so if you can afford to put down more, you’ll end up paying less interest overall.
However, saving a larger deposit can be easier said than done, especially if you’re currently renting and have limited spare cash to save each month.
You may also decide you want to get on the property ladder sooner rather than later if you think prices are going to rise, because if this does happen, it could make it even harder to build up a deposit.
There’s no right or wrong answer as to whether you should continue to save – it will depend entirely on your individual circumstances and when you want to buy.
The Government announced the launch of its new scheme in the March 2021 Budget, with the aim of encouraging more lenders to offer 95% LTV deals.
Mortgage guarantee scheme explained
First time buyers and existing homeowners can purchase a property up to the value of £600,000 using a 5% deposit. The Government will provide a guarantee on the mortgages offered and will cover some of the lenders’ losses if the property is repossessed and sold for less than the outstanding mortgage.
Under the terms of the scheme, lenders must offer a five year fixed rate within their product range to help those who want longer-term security.
The scheme will run until December 2022.
The Government has a Help to Buy scheme to help struggling first time buyers with small deposits.
Help to Buy explained
With the equity loan scheme, you only need to put down a 5% deposit. The Government then lends you 20% of the property price, so you only need a mortgage for the remaining 75%. If you’re buying in London the Government loan increases to 40% of the property price, so you would need a mortgage for the other 55%.
You can find out more about how the scheme works in our Help to Buy guide.
You can discuss your options and find out how much you might be able to borrow by speaking to one of our expert mortgage advisers.