Spring is generally a busy season in the real estate market. This year it follows months of frantic activity fueled by stamp duty tax reductions, making it impossible to forecast how many buyers and sellers will enter the market as lockdowns loosen around the UK.
The good news for first-time buyers is that they will soon have a more extensive selection of mortgages that just demand a 5% down payment.
Here, we look at the alternatives available to first-time homeowners hoping to get their foot on the housing ladder, as well as whether a 95 per cent mortgage is a reasonable option for first-time homebuyers.
What is a 95% Mortgage?
A 5% deposit mortgage allows you to borrow up to 95% of the buying price. So, if you are purchasing a £300,000 property, you will just need to put down £15,000.
This is in contrast to a 90% mortgage (or 10% deposit mortgage), which would require you to double your deposit.
5% deposit mortgages have been difficult to come by in recent years, notably during the pandemic, since they pose a more significant risk to lenders.
However, more are becoming accessible due to the government's mortgage guarantee plan, which will be launched in April 2021.
Although the policy does not directly benefit borrowers, it encourages lenders to issue 95% mortgages by pledging to reimburse costs incurred if a borrower fails on a loan.
One important thing to note is that the 95% Mortgage option is earmarked to last until December 31, 2022.
What are the Pros and Cons of a 95% Mortgage?
Pros
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Property prices are at an all-time high, making it difficult to climb the housing ladder. With a 95 per cent mortgage, you simply need to save 5% of the property's worth.
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Those monthly rental payments may appear to be a waste of money if you're currently renting. The sooner you start on the housing ladder, the sooner you will be able to invest equity in a property.
Cons
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The lender may charge you a higher interest rate because you're borrowing a substantial portion of the property's worth.
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You may find it difficult to switch to a new mortgage when your current one expires. People with more significant equity tend to get better offers from lenders.
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There's also the issue of negative equity to consider. If the value of your property drops, you may owe more than it is worth.
Are You Eligible For a 95% Mortgage?
One of the first things you should determine whether you're qualified for this plan is whether you're eligible for it. Lenders will first look at your credit score, which will impact their judgement on whether or not to offer you the mortgage.
This sort of financing program is not available for all houses. The following are the eligibility requirements:
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You must buy a home in the United Kingdom.
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The property should cost less than £600,000.
How to Select the Right 95% Mortgage
To choose the best 95 per cent mortgage, you must analyse two types of loans: fixed-rate loans and variable-rate loans. A fixed-rate mortgage can last between two and five years, so you won't have to worry about interest rates fluctuating during that period. You must search for another loan at the end of the term; otherwise, it will be moved to the lender's ordinary variable rate, which might cost you a lot of money.
On the other hand, a variable-rate mortgage is something you should think about. Lenders now provide Standard Variable-Rate (SVR) mortgages. You might also choose a tracker mortgage, in which the interest rate is tied to an external benchmark. When the base rate changes, so does the tracker rate.
When you've decided on a loan type, compare mortgage quotes from several providers. This will show you the highest LTV that each lender can provide you and the types of mortgages available. It will also include any additional fees you must pay.
What are Other Alternatives to a 95% Mortgage?
If you aren't comfortable taking out a 95 per cent mortgage, you don't have to put your goal of owning a home on hold.
There are various programs that might put house ownership within your reach.
These are some examples:
Help to Buy Equity Loan
This arrangement provides first-time buyers with a 5% down payment access to an equity loan worth up to 20% of the property's purchase price (40 per cent in London). The financing is interest-free for the first five years, providing purchasers with much-needed financial breathing room. The caveat is that you may only use it to purchase a new house.
Shared Ownership
Shared ownership provides you with the opportunity to buy a property with a smaller deposit and a smaller monthly mortgage payment. You purchase a share of the property and pay rent on the remaining share. In most cases, you'll end up leasing it from a housing association and continue paying rent until you've bought more shares.
First Homes Scheme
The First Homes Scheme is a government effort that may allow first-time purchasers to get a 50% discount on a new-build property.
The initiative is aimed at those who are at risk of being priced out of their community, particularly vital professionals such as NHS employees and teachers.
So, Should You Get a 95% Mortgage?
Whether or not it makes sense to buy a home with a 5% down payment ultimately relies on:
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Your own personal situation.
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The compelling need for you to purchase a home.
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The status of the home market in the location you want to buy in.
A mortgage with a 95 per cent down payment may be more costly. However, if you are keen to climb on the housing ladder and are convinced that both your salary and house prices will improve, it may be the best option for you.
Higher home prices may allow you to refinance to a lower 90 per cent or 85 per cent mortgage in a few years.
However, if you are less sure about your personal finances and are concerned that property prices will collapse, it may be better to wait a little longer and continue saving.
With a larger deposit, lenders will view you as a smaller risk, and you will benefit from reduced mortgage rates when you do decide to buy.
Conclusion
A 95% mortgage can seem like an affordable scheme for those looking to get on the property ladder. However, with the risk of rising interest rates, the effects of negative equity, and the possibility of having to switch or transfer your mortgage, it's not something to rush into.
If you're sure that you want to invest in a property, do your research and think about your long-term goals. Keep in mind that by saving up for a larger deposit, you'll increase the equity you have in your home. That's what will enable you to refinance to a better mortgage deal in the future.
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