Arranging a mortgage in any circumstance poses a number of challenges, but working with first time buyers can be especially complex. To help ease the transition for aspiring homeowners to get themselves onto the property ladder, a number of schemes have been introduced that benefit all parties involved in the mortgage process – the buyer, the lender and of course the mortgage broker. One such government-imposed scheme is the 95% mortgage programme. This mortgage guarantee scheme goes a long way in making mortgage repayments more affordable for those who need extra financial support. To make sure your customers, who find themselves in need of this additional assistance, have all the facts when it comes to how 95% mortgages work, keep reading to find out more…
What is a 95% LTV mortgage?
A 95% mortgage, also referred to as a 95% LTV (loan-to-value) mortgage, is a type of financing contract that allows applicants to obtain a mortgage without having to put down the standard 10-20% deposit, which is ordinarily required. Instead, only a 5% deposit is needed to be put down by the buyer, with the remaining 95% of the property value being financed during repayments. The amount a customer will be able to borrow while securing a 95% mortgage will vary, as it would when arranging a standard mortgage, with factors such as credit ratings and individual lending criteria coming into play.
What is the smallest deposit a customer can use to buy a house?
A 5% deposit represents a much lower initial payment than normal when looking to purchase a house. It is in fact the lowest deposit a customer will be able to put on a house in the UK, as long as they have a 95% mortgage arranged for them. There isn’t actually a lower deposit percentage that is acceptable for buying a house, so if your customer is looking for something even lower then it’s simply not possible.
Advantages and disadvantages of a 95% mortgage
If you are having conversations with your customer and they are expressing concerns over raising funds for their deposit, making them aware of what a 95% mortgage is can lead to an outcome which ultimately sees them secure a mortgage on their dream property. However, it is essential that they are made aware of not just what the benefits of this mortgage type are, but also what the potential drawbacks are. There are many different mortgage types available to choose from in the market which may be better suited for your customer, which you can brush up on here. For the benefits and drawbacks of this mortgage type though have a read of the following.
Advantages of a 95% mortgage
- Gets a customer on the property ladder sooner – Saving up for a deposit can halt a customer’s progress and prevent them from getting on the property ladder as fast as they would have hoped.
- Allows customers to save more towards their home – Since the deposit required for this mortgage type is only 5% of the property value, your customer will be able to save up for their mortgage, plus all the other hidden costs of buying a house faster than they ordinarily would.
- Can be cheaper than renting – 95% LTV mortgages are especially useful for first time buyers, who perhaps do not want to rent. A key advantage of this mortgage type is that in the long term, it can actually work out cheaper financially than opting to rent.
Disadvantages of a 95% mortgage
- Higher interest rates – The lower the deposit amount put down, the more expensive the mortgage rates your customer will be obligated to pay back.
- Limited lender choice – Not all lenders will be willing to offer this unique type of mortgage scheme, which means both you and your customer will have a more selective panel of providers.
- Issues with remortgaging – Since a 5% deposit provides a buyer with little equity in the property they are looking to purchase, it may take some time to reduce the LTV (loan-to-value) to a point where they can then benefit from competitive rates when remortgaging.
Should you recommend 95% mortgages to first-time buyers?
The main upside of this type of mortgage is that it allows an aspiring homeowner to begin their journey on the property ladder sooner. This is because the initial barrier to entry is lessened since the deposit needed to secure a mortgage is reduced. So of course this will benefit first-time buyers, making a 95% mortgage a worthwhile inclusion during any discussions on the subject. There are other government mortgage schemes available which could also be beneficial to your customers, so make sure you are aware of this product, so that they can make their decision based on knowing what all the different options are.
What are similar alternatives to a 95% mortgage?
A 95% mortgage isn’t the only mortgage scheme available to your customers, designed to make the process of owning a home more flexible and attainable. In fact, there are a number of additional proposals you can make which might better suit their needs and budgets. This includes some of the following:
- Shared ownership – Allows a customer to purchase a home even if they cannot afford the deposit or subsequent mortgage repayments. Instead, a share worth between 10 – 75% of the property value is purchased, with the amount remaining paid to a landlord.
- Joint borrower/sole proprietor mortgages – Also referred to as a guarantor mortgage. If a customer is unable to meet the requirements for a mortgage on their own, they can leverage the income from a family member or close relation to prove to lenders that mortgage repayments can be met, without them actually being party to the mortgage.
- Rent-to-buy – This government scheme grants buyers the ability to rent a property initially but then transition into full home ownership, as rent repayments contribute towards the deposit.
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