Pros and Cons 95 percent mortgages

The pros and cons 95 percent mortgages where you must provide a deposit – of 5% of the purchase price.

There are some mortgage lenders that offer competitive 95% mortgages. Most lenders offer better interest rates at 90% loan to value and currently this Loan to value (LTV) the preferred lending mark.
Mortgage income multipliers can be lower for 95% mortgages compared to a higher percentage loan to value

Advantages

  • You can buy a home if you have a small deposit

The following case study illustrates the case

First-time buyers will be given access to 95 per cent mortgages by a new lending partnership between Saffron Building Society and house-builder Taylor Wimpey.

East Anglia-based Saffron’s 95 per cent loan-to-value (LTV) mortgages will be made possible by an exclusive mortgage guarantee scheme provided by Taylor Wimpey.

The house-builder will offer the ‘Take5’ mortgages initially on housing developments in East Anglia, the east Midlands and east London.

The scheme means that buyers in the region could secure a two bedroom home with a deposit of just £5,750, compared with the current UK average of £28,770.

John Eastgate, Saffron’s sales and marketing director said: “With rental prices and the cost of living rising, many prospective first-time buyers are simply not able to save the substantial deposits required of many current mortgages.

“We know that there are many potential borrowers who are capable of supporting a mortgage but are ‘frozen out’ of the market by the large deposits required.

“Affordability remains a core priority with every mortgage that we underwrite, particularly given the potential for rising interest rates.

“Our use of manual underwriting is particularly appropriate for the First-Time buyer market, and we look forward to supporting these new customers throughout the life of their loans with us. It is our view that the First-Time buyer crisis can be alleviated in part though common-sense lending and schemes such as this one from Taylor Wimpey.”

As can be seen the collaboration between Taylor Wimpey and Saffron seeks to create a win – win situation. Since many potential buyers simply do not have the deposit to put down in the purchase of a property.

Disadvantages

  • Higher interest rates compared to mortgages with a lager deposit
  • High mortgage set up costs as many 95% mortgage lenders charge a higher lending charge
  • However, the disadvantage can be far more reaching in the medium to long term for the person e.g. negative equity

This can be further illustrated by the following example – A popular product called the NewBuy Guarantee Mortgage

NewBuy Guarantee is designed to offer competitively priced mortgages for those who have relatively small deposits, provided that they are buying a newbuild property.

It is hoped the scheme will stimulate demand for newbuild properties, creating jobs in the construction industry and kick-starting the stagnant property market.

But critics fear it could lead to young homebuyers taking on more debt than they can afford and saddling them with negative equity if house prices fall further, leaving taxpayers rather than the banks to cover any bad debt.

The following questions and answers provide more information on how the scheme works.

A: The main advantage of the new scheme is that first-time buyers can borrow up to 95pc of the property’s purchase price – so only need to put down a 5pc deposit. Since the credit crunch most banks have required buyers to save at least 10pc of the purchase price, and the more competitively priced mortgages have been available only to those with a 20pc deposit.

This has made it difficult for many first-time buyers to get finance, and the consequent lack of demand has created problems for those further up the housing ladder. Of course the disadvantage is that they are less flexible, as there are tighter restrictions on who will qualify for one of these loans.
Q: Who can get a NewBuy mortgage?

A: The key criterion is that you must be buying a newbuild property, so those buying a flat in a Victorian conversion, for example, will not benefit from this scheme. It is running only in England, and the builders or developers must have signed up to the scheme. Although it is aimed primarily at first-time buyers, those who are buying their second or third property are not excluded (provided that they meet the other criteria).

However, to qualify the property must be your main home, not a buy-to-let, and the property must be purchased for less than £500,000. In addition you must be a British citizen and have saved for the deposit without help from a local or public authority.

Q: When will these loans be available?

A: From this week. Three lenders, Barclays, Nationwide and NatWest, have already launched such deals, and both Halifax and Santander have expressed interest in following suit.

Q: What rates are they charging?

A: Mark Harris, the chief executive of SPF Private Clients, a mortgage broker, said the rates being offered were fairly competitive. The cheapest deal at present is from NatWest, which is offering a two-year fix through the scheme at 4.29pc, with a £499 arrangement fee. It’s also offering a five-year fix at 4.99pc (with the same fee).

In contrast Barclays is offering a two-year fix at 4.99pc and a four-year fix at 5.89pc – both also charge a £499 arrangement fee. Nationwide’s deals are slightly more expensive. It is offering a three-year fix at 5.69pc and a five-year fix at 5.99pc. In both cases there is a £900 product fee, plus a £99 booking fee, although first-time buyers will qualify for a £500 fee discount, meaning that they will pay £499.

Q: How do the rates compare with existing mortgage deals?
A:The rates offered are pretty competitive. Only a handful of lenders offer 95pc mortgages at present. Outside the NewBuy scheme the best is from Skipton Building Society, charging 6.29pc on a five-year fix (with a £195 fee).

David Hollingworth of London & Country mortgage brokers said the rates looked good when compared with the deals being offered to those who have saved a 10pc deposit. Here, Nottingham building society is offering a five-year fix at 4.74pc (with no fee), only marginally cheaper than NatWest’s NewBuy deal, which doesn’t require such a large deposit.

However, those who can save a significantly larger deposit will qualify for a cheaper deal. Market Harborough building society, for example, charges just 3.99pc on its five-year fixed-rate deal (with a £245 fee), but only on mortgages that are worth no more than 80pc of the property’s value.

Q: Why are all these NewBuy deals fixed-rate mortgages?

A: This protects first-time buyers from any interest rate increases, which would push up mortgage repayments. However, most brokers recommended opting for a longer-term fix, as there is the danger that a two-year fixed-rate deal will expire just as rates increase.

Q: Does the government guarantee mean first-time buyers will be protected from negative equity?

A: No. The government guarantee helps the banks offering these loans, not the borrower. If you are in negative equity you will still find it difficult to remortgage or move to another property, and in the worst-case scenario you could be repossessed if you fail to keep up with payments.

If this happens, and the lender sells at a loss, the borrower is still liable to make up any shortfall. However, if house prices fall significantly, ordinarily banks face additional losses on such bad debt if home owners can’t repay. With this scheme, the developers and the Government have contributed to a fund to cover a limited amount of these future losses, which it hopes will encourage banks to lend more.

Q: Do I have to take out a 95pc mortgage?

A: No, if you have a deposit of between 5pc and 10pc you can qualify for one of these mortgages. A bigger deposit will help protect you from negative equity and will reduce overall mortgage costs, as you are paying interest on a smaller sum.

95% Mortgage Lenders Maximum Borrowing

When looking at 95% best buy table it is important to realise that mortgage lenders place limits on the maximum mortgage they will advance. In many cases a purchase price over £250000 will see many of the main 95% mortgage lenders offering lower loan amounts.
In the end, it is a question of choice and taking advantage of the opportunities available to you at the time – All the best with your purchase.

References:

  1. Telegraph
  2. FT Adviser
  3. My First Home


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