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This week marks the start of the government-backed 95% mortgage guarantee scheme. This has prompted some of the country’s largest banks to re-introduce 95% mortgages after they were pulled from the market amid the Covid-19 pandemic in 2020 due to their high-risk nature.

This guide will go through how 95% mortgages work, the new mortgage guarantee scheme, as well as the pros, cons, and whether a 95% mortgage is right for you.

What is a 95% mortgage and how does it work?

A 95% mortgage does exactly what it says on the tin – allows you to borrow 95% a property’s value using a mortgage. This means that you would only need to find 5% of the purchase price as a deposit.

For example, if you wanted to purchase a property worth £200,000, then you would put in £10,000 as a deposit and you would borrow £190,000 on a mortgage and pay this back in monthly instalments.

What is the 95% mortgage guarantee scheme?

The government backed 95% mortgage guarantee scheme was launched on 1st April 2021 as a way of making home ownership more accessible for first-time buyers.

The scheme involves the government guaranteeing the portion of the mortgage over 80% (so the final 15% of a 95% mortgage). This means that, if you were to default on your mortgage, you would be responsible for the 80% and the government would compensate the lender for the remaining 15%.

This removes the additional risk that 95% mortgages usually create as the 15% is guaranteed. This means that the lender can essentially treat it as being on the same risk level as a more traditional 80% mortgage.

Who is eligible for the 95% mortgage guarantee scheme?

Anyone is eligible to apply for the 95% mortgage guarantee scheme as long as you pass the standard mortgage affordability checks and a credit score assessment.

This incudes first time buyers and those looking to move up the property ladder.

What properties can you buy under the 95% mortgage guarantee scheme?

Under the 95% mortgage guarantee scheme you can only buy a property that you intend to live in, so second homes and buy-to-let properties are not eligible.

Both new-builds and existing properties are eligible up to a purchase price of £600,000.

What lenders/banks are offering mortgages under the scheme?

A lot of the country’s major banks, including HSBC, Lloyds, Barclays, Santander, and NatWest have all launched 95% mortgages under the guarantee scheme.

Participating lenders need to offer a five-year fixed-rate mortgage as part of the product range in order to give borrowers more security over predictable payments for longer.

Benefits of a 95% mortgage

The most obvious benefit of a 95% mortgage is that you only need to put in 5% of the purchase price.
This makes getting onto the property ladder a far more realistic and achievable goal for first-time buyers.

95% mortgages could also help existing homeowners to upsize their homes.

Things to consider before taking out a 95% mortgage

Higher interest rates

One downside to 95% mortgages is the higher interest rates. The higher the LTV (amount borrowed compared to the value) then the higher the interest rate (usually).

You will need to go through certain affordability checks before a mortgage is approved. The lender will assess all of your income and outgoings to determine whether you can comfortably afford the monthly repayments. The more your borrow, the higher the monthly repayments will be.

They will also ‘stress test’ your finances which means assessing whether you can still afford the mortgage is interest rates rise by a certain amount.

Negative equity

If house prices fall and the value of your property decreases, having a 95% mortgage puts you at higher risk of falling into ‘negative equity’. This means owing more than the property is worth. The more equity you have in the property (the proportion owned outright by you) then the less chance there is of this happening.

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