for borrowers

95% LTV mortgage or 5% deposit – what’s the deal?

Find out how 95% mortgages work, why you’re hearing all about them now and what possibilities they offer.

 

A 95% mortgage is a loan which is equivalent to 95% of the value of your home. Another way of explaining it is as a 5% deposit mortgage, this means it’s a mortgage that you’ve secured by giving the bank or building society a 5% deposit.

Put simply …. If your future home is valued at £200,000:

  • a 5% deposit would be £10,000
  • a 95% mortgage would be £190,000

The other abbreviation that you’ll often see is LTV, this means Loan To Value, normally written as 95% LTV. Using the scenario above it means the Loan (£190,000) is 95% of the Value (£200,000).

 

Working out the sums…

There are lots of calculators available online to help you work out how much deposit you might need, or how much your mortgage would be. But, if you’re busy viewing your potential new home and you want to quickly understand the numbers, grab your phone calculator and use the sums below:

The home you’re looking at is for sale at £260,000

  • To work out a 5% deposit: 260,000 / 100 x 5 = 13,000

So a 5% deposit would be £13,000

  • To work out your total mortgage loan: 260,000 / 100 x 95 = 247,000

So a 95% mortgage would be a loan of £247,000

 

The government backed mortgage scheme

The government has recently launched a ‘government-backed mortgage scheme’. They’re offering lenders (banks and building societies), a guarantee against the mortgage, to encourage them to be confident and lend money for homes to customers with a 5% deposit.

The reason they need to reassure lenders is because there is uncertainty around whether house prices may decline as a result of the economic effects of the global pandemic. If customers buy a home with a 5% deposit and house prices drop, they could find themselves in negative equity – this is explained with an example below:

 

What is negative equity?

Katy buys her new flat in Great Dunmow for £200,000, she pays a 5% deposit of £10,000 and has a mortgage of £190,000.

Six months after living in her home, she’s paid off £1,800 of her mortgage so her outstanding mortgage is £188,200.

House prices have dropped by 7%, which means her flat is now worth £186,000, so… if Katy needed to sell her flat, she wouldn’t have enough money from the sale alone to pay back her mortgage to the bank.  

The Cambridge Building Society do offer 95% mortgages, but aren’t taking part in the government backed mortgage scheme. We’ve a long history of helping people have a home, and have a team of expert mortgage advisers available for appointments who speak with each customer about their situation. This gives us the confidence that we’re able to offer mortgages to people who are in a secure financial situation. 

 

5% deposit – done, can I get a mortgage now?

If you’ve worked your sums and you’ve got a 5% deposit or more saved, that is the first step complete. Buying a home is a big financial commitment and there are some other key things to consider and work through.

An important point is whether you can afford the mortgage repayments. Your mortgage repayment is the monthly amount you’ll pay towards your mortgage. Considering whether you can afford it means, working through all your monthly costs (including your new mortgage repayment) and understanding whether your monthly income covers your costs and leaves you money spare.

Working out affordability is complex and that’s why we look to our expert mortgage advisers to help you with this. Don’t be disheartened if you don’t think your income will cover costs, there are plenty of options available to help you get on the property ladder, and our mortgage advisers will help you explore these.

Book an appointment with one of our mortgage experts today.

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