5 Percent Deposit Mortgage UK
Podcast recording in November 2023.
5 Percent Deposit Mortgage UK
Steven Hargreaves explains 5% deposit mortgages in the UK.
Can you get a mortgage with a 5% deposit in the UK?
Yes, 5% deposits are back again. The government re-announced them in April 2022, so they’ve been around for quite a while now. The majority of lenders have actually started doing 95% mortgages that are not government-backed.
It was a fantastic improvement to the market, because in the majority of cases it’s First Time Buyers that need a 95% mortgage. They’re living at home or renting – and while they’ve saved the 5% deposit, they also need money for legal fees and everything else.
We needed those First Time Buyers back in the market, which is why the government took action to make sure 95% mortgages were readily available. Now, I can’t think of a lender that doesn’t have a 95% mortgage. They’re certainly widely available.
How does a 95% mortgage work?
They are exactly the same as any other mortgage, whether it’s a 90% or 75% or 50%.
As a nice, easy example, if a house price was £100,000, a First Time Buyer would have to save up 5% of that, which is £5,000, as their deposit. For a 90% mortgage they would put down 10%, which is £10,000.
What lenders allow a 5% deposit?
95% mortgages are available right across the market. It’s certainly worth looking at the different lenders, because there are big swings from one lender to another as far as rates are concerned.
That’s probably why a First Time Buyer would use a mortgage broker, to see who’s offering the most suitable 95% mortgage, or 90% or 80% mortgage.
Because the majority of lenders are offering 95% mortgages, it’s just a case of picking the most cost-effective one for a client.
What is the criteria for a 95% mortgage?
As with any mortgage it comes down to passing credit scoring with a lender. You do tend to find the higher the Loan to Value – i.e. the smaller deposit you’re putting in – the tighter the lenders are around credit score.
As an example, if you’ve had a missed payment on a credit card, that might affect you getting a 95% mortgage, but it may not affect a 60% or 70% mortgage.
That’s down to the risk that the lender’s taking on. If that lender has any issues and the house is repossessed down the line, on a 95% mortgage there’s a slimmer chance that the lender will get all the money back. So the criteria is a little bit tighter.
Income multipliers also tend to be a little bit tighter for a 95% mortgage than a 90% mortgage. But that said, for a good First Time Buyer there should be no problems at all.
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What types of 95% mortgages are there?
You can look at fixed rate mortgages, tracker rates, there are even discounted mortgages out there, as well. It’s the same range across the board that you can get on a 90% or 80% or 70% mortgage.
Lenders at the moment are targeting fixed rate mortgages. We’re in November 2023 now, and the best value for money mortgages at the moment seem to be the five-year fixed deals. The two- and three-year deals are quite expensive at the moment. But there are other other options available.
What does LTV mean?
LTV is Loan to Value. If it’s a 95% Loan to Value it means it’s a 95% mortgage. 100% LTV is a 100% mortgage. It just means the amount you’re getting from the lender, less your deposit.
So if it’s a £100,000 mortgage and you’re putting a 5% deposit in, that’s 95% Loan to Value.
Can I get a 95% Loan to Value Buy to Let mortgage?
No. With a Buy to Let mortgage, lenders are looking for more deposit. Traditionally you need to put a 25% deposit down, which is a Loan to Value of 75%.
However, I was looking for a client recently and found some 80% Loan to Value mortgages on Buy to Let, and there was also an 85% product. The interest rates were very expensive, though, and it was very much a specialised lender rather than a high street bank.
Who is eligible for a 5% mortgage? Is it just First Time Buyers?
No, it isn’t. I keep mentioning First Time Buyers. but these mortgages are open to anyone. A few months ago I helped some clients who had sold their property but they didn’t have an awful lot of equity in it. They were looking for 95% mortgage on their onward move.
I arranged a 95% mortgage for these second time buyers, so they are available for home movers too.
Can I get a 5% deposit mortgage if I’m self-employed? Can I get a 95% Loan to Value mortgage with just one year’s accounts?
Yes, and yes. Whether you’re self-employed, employed, retired or otherwise, with a mortgage it’s all down to your income.
With an employed person we work off your gross salary. With a self-employed person we would either work off your net profit, an accountant’s certificate or tax calculations and tax overviews from HMRC. As we can prove your income and prove you can afford that mortgage, a lender will lend.
We are very limited if you only have one year’s accounts. We do have a lender that will look at that, within a larger picture. They’ll look into what you’ve previously been doing and how that year’s gone. But usually it’s not a problem.
What are the pros and cons of a 5% deposit mortgage? What are the risks?
Any lender is looking at their risk. There is more risk that they won’t get all their money back on a 95% mortgage if anything happened and they had to repossess the property. That’s why the rates tend to be a little bit more expensive.
A 90% mortgage will be cheaper, and 85% is cheaper again. Once you get to around 60% Loan to Value you will find the cheapest deals. So the rate is a little bit higher on a 95% mortgage, but then it could take you another six to 12 months to save another 5%.
So the big pro is that you can buy a property today with that 5% deposit. You don’t have to wait until you’ve saved another 5%. The con is the interest rate, because on the highest Loan to Value, mortgages are a little bit more expensive.
What are the alternatives to 95% mortgages?
Effectively if you’ve saved some money and you’ve got a 5% deposit, this is your only option. One alternative is gifted deposits from parents or grandparents, to boost that total. But that isn’t available to everyone.
How do I get a 95% mortgage? How can a mortgage broker help here?
There are plenty of 95% mortgages out there with the different lenders. A mortgage broker will look at your income and affordability to match you with the right lender.
Hopefully in the process they would also save you some money – because there is a big swing from one lender to another as far as 95% mortgages are concerned. We look at all the different lenders, work out who will lend to you and at the cheapest rate that we can find.
Your home may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
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