What are 95% loan-to-value mortgages and how could they help you?

One of the most notable announcements from the chancellor’s spring Budget was the news that the government would be reintroducing government-backed, 95% loan-to-value (LTV) mortgages.

Helping people get onto the property ladder was a key part of this government’s manifesto, and so this scheme is the first step in their efforts to turn “generation rent” into “generation buy”.

This promise now looks to be more of a reality, with a scheme that will make homebuying more accessible. And, while the scheme is mostly for first-time buyers, home movers and previous homeowners will be able to use it too.

95% LTV mortgages could be a big step in the right direction for helping people buy homes, especially in an environment that recently hasn’t been too kind to buyers with smaller deposits.

High deposits and smaller loans have made it difficult for buyers

In the past year, there has been a significant decline in the number of 95% LTV mortgages available. At the beginning of June 2020, Moneyfacts found there were just six deals for buyers with a 5% deposit in the whole mortgage market.

Lenders pulled these larger LTV deals from their offerings as coronavirus damaged the property market, with house prices falling four months in a row from the first lockdown in March.

To make matters worse, the average first-time deposit in the UK in 2020 reached nearly £60,000.

In Scotland, the figures are slightly more forgiving, with an average deposit of £35,745 for first-time buyers. However, this still represents a 19% increase from the average deposit of £30,101 in 2019.

With lenders asking for bigger deposits, and larger loans hard to come by, the 95% LTV mortgage scheme could help buyers with smaller savings pots finally take a step towards home ownership.

LTV is an important figure, both for you and for lenders

Simply put, LTV is the proportion of a property price that’s covered by a mortgage.

For example, if you were purchasing a home for £100,000 and you had £5,000 for a deposit, you would need a mortgage of £95,000. As £95,000 is 95% of £100,000, your LTV would therefore be 95%.

LTV is important to lenders because the higher the proportion of the loan, the more of a risk you present to them.

If the price of the house drops and the lender is forced to repossess the property for any reason, a higher LTV means they are more likely to end up with a house that’s worth less than the loan they gave out.

Therefore, the higher the LTV, the higher this risk for the lender. Equally, it means a smaller deposit for you as the buyer. That’s why it’s an important metric for both parties.

Smaller deposits and more choice for buyers

95% LTV mortgages will offer two key benefits for buyers:

  • You’ll be able to buy a home with a smaller deposit. According to the UK House Price Index report, the average house price in Scotland in January 2021 was £164,099. With a 95% LTV mortgage, that means you’d need to put up just £8,205 as a deposit, on average. This means you’re able to get a loan with a smaller savings pot.
  • The number of products available across the market will increase. More options in the market means more choice of lenders, interest rates and mortgage terms.

Currently, the list of lenders taking part in the scheme includes:

  • Barclays
  • HSBC
  • Lloyds
  • Santander
  • NatWest

Virgin Money are rumoured to be considering a 95% LTV product as well.

The government will back lenders that take up the scheme with a “mortgage guarantee”, which will pay part of the potential loss lenders may face if they have to repossess a property.

Moving forward, this should encourage even more lenders to take part in the scheme.

The scheme does include some rules and restrictions

As these mortgages are government-backed, they do come with a set of eligibility criteria that you must meet:

  • The property price must be £600,000 or below. The scheme is mostly intended for first-time buyers, so there’s a cap on the maximum property price of £600,000.
  • You can only get a repayment mortgage. Rather than an interest-only mortgage, the mortgage must be a repayment deal. This is unlikely to be an issue for you as interest-only mortgages are relatively rare in the market.
  • You must be buying a residential property in the UK. As this scheme is meant to help people buy their own homes, it can’t be used by buy-to-let landlords.
  • Normal affordability checks still apply. Mortgage lenders will still carry out their usual affordability and credit checks. If you’d like to find out best practices for getting accepted, please speak to us at Edinburgh Mortgage Advice.

Outside of the government-backed scheme, smaller lenders are also starting to offer 95% mortgages. It may be worthwhile considering one of these lenders, as they may be able to give you a 95% deal with greater flexibility and less restrictions from the government-set rules.

If you’d like to know whether this could be a good choice for you, please do speak to us at Edinburgh Mortgage Advice.

Higher LTV usually means a higher interest rate

One point worth considering is that a higher LTV typically means a higher interest rate. As a result, this means higher monthly repayments and a larger total paid back to the lender across the whole term.

95% LTV mortgages are very helpful if you’re looking to buy with a smaller deposit. But, if you can save a little bit extra and get that LTV down to 90% or even 85%, you could save yourself money in the short and the long run.

Get in touch

If you’d like to know how the 95% LTV mortgage government scheme could help you get on the property ladder, please get in touch. Email enquiry@edinburghmortgageadvice.co.uk or call 0131 339 2281.

Please note:

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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