What Are 95% Mortgages & Will They Help First-Time Buyers?

On March 3, Rishi Sunak announced his new Budget for 2021. Many were focused on how the Chancellor of the Exchequer was going to help those looking to purchase property in the coming year, particularly first time buyers. With a Stamp Duty holiday being announced last summer amid the ongoing pandemic, property buyers were looking to see if this would be extended, and what else would be introduced, including the new 95% mortgages. But what are 95% mortgages and how can they help first time buyers?

Put simply, 95% mortgages are low deposit mortgages that allow buyers to only put down 5% of a property's total cost, with the rest being borrowed from lenders. This form of mortgage has been practically extinct in the years following the 2008 financial crisis, and particularly rare in the past year since the pandemic began. Due to the impact Covid-19 has had on the UK economy, most mortgage lenders have only been offering a maximum of 90% loan-to-value, meaning first time buyers have had to come up with a 10% deposit straight off the bat.

In fact, the Help To Buy scheme many first time buyers are familiar with was introduced thanks to the rarity of low-deposit mortgages. And now, Rishi Sunak's 95% mortgage promise hopes to be the latest scheme to put them back on the table to aid those who struggle to save for a deposit to get onto the property ladder.

I spoke to the experts to navigate the situation, and to lay out all the facts in simple, easy-to-understand terms.

If you're new to property altogether and don't have much prior knowledge of mortgages, this new scheme may seem intimidating. Luckily, I've spoken to some experts to explain in simple terms just what this all means.

"A 95% mortgage means that your mortgage provider is lending you 95% of your property value, with just a 5% deposit required from your own funds to make up the difference," explains Gary Hemming of ABC Finance Ltd. "In practice, this means that for a £200,000 property, you would only need a £10,000 deposit, and would receive a mortgage of £190,000."

Sunak announced in his budget report that he believes this "gives people who can’t afford a big deposit the chance to buy their own home." It will be available to all homes under the cost of £600,000, which according to Rightmove, accounts for 86% of all houses on sale in the UK right now.

These types of mortgages will come into affect from April 2021, and will be available until Dec. 21, 2022. In Sunak's speech, he announced the “several of the country’s largest lenders including Lloyds, Natwest, Santander, Barclays and HSBC will be offering these 95% mortgages from next month," before adding that “more, including Virgin Money will follow shortly after.”

On first glance, this new scheme is a very, very good thing for first-time buyers. "In principle, the new scheme acts as an incentive for first-time buyers because the purchaser will require a smaller deposit at the start of the loan," notes Dr Ian Jackson, Senior Lecturer in Economics and Finance at the University of Wolverhampton. That could mean saving up £10,000 rather than £20,000 to put a deposit down on your first home, which when you consider how hard saving up for one can be, is undeniably a positive thing. "With house prices growing so much in recent years, this will hopefully help first-time buyers get onto the property ladder, by getting rid of often unachievable deposit requirements," agrees Hemming.

It's important to note too, that this scheme is available on homes under £600k, so does not cater exclusively to first-time buyers like prior ones have (think the Help To Buy scheme, for example). In this way, it looks set to help all sorts of people on the property ladder.

Sadly yes, there are several issues to consider here, or potential dangers and downsides that the experts are concerned about.

First off, it's important to note that just because you now may be able to afford the cost of a mortgage, it doesn't mean you'll necessarily be accepted for one. It is not yet suggested that banks will be helped to adjust their usual affordability checks when running this scheme, meaning that your acceptability will still be based largely on your salary. As things currently stand, mortgage lenders usually offer loans of up to 4.5 times the buyer’s salary, meaning you have to be earning a certain amount before you can actually be granted a mortgage. This often means that single people miss out (couples can combine their incomes to reach the threshold), as Hemming points out: "Sadly, for many single people, buying a house just isn’t realistic, even with reduced deposits. Couples may have more luck, which while potentially unfair, is the reality for many."

You also may struggle depending on where you live; big city-dwellers where house prices are much higher require a significantly larger salary for mortgage acceptance. In short, little looks set to change in terms of whether you'll actually get accepted for a mortgage. David Miles, CBE, Professor of Financial Economics at Imperial College points out that for single people and big city dwellers on 'average' salaries, 95% mortgages will help "only to a limited extent." He also points out that even if you can afford a deposit, "lenders still need to assess whether people can pay the mortgage if interest rates go up by around 3%."

The experts I spoke to can see some other potential issues with 95% mortgages, too. The overarching concern is that it may increase the cost of property in the long term. "It will almost certainly increase demand for a lot of typical first-time buyer homes, so we could well see competition, and therefore prices increase. This could mean that we fix one problem, but inadvertently create another," says Hemming.

Those hoping to make the most out of the scheme also need to think carefully before getting on the property ladder with such a low deposit committed. "As you’re not putting a great deal into the purchase, you need to be conscious of future property prices," advises Hemming. "Should prices drop, your equity could be eaten up quickly, which is a problem should you choose to sell." You may even end up owing money on your house, rather than gaining equity if prices were to crash. Equity is the value of the amount of your house you own, which is determined by your deposit and how much you have repaid to your lender through mortgage payments. For example, if your property is worth £150,000 and you put down a deposit of £30,000, you have 20% equity. When you have repaid your mortgage entirely, or if you pay for a house outright without taking a mortgage, you have 100% equity.

This by no means suggests that the scheme will not be helpful to many or is not worth considering, but these are all factors to take into account especially during these uncertain times we are living in. "This initiative is designed to be a positive form of help, but it may not suit everyone," summarises Jackson. "For example, it may be sensible for some people to wait to buy with a bigger deposit or delay purchase until such time as personal and work circumstances are more settled rather than buy now. My recommendation is always to seek advice from financial and legal professionals as well from trusted family and friends who know your situation well."

Outside of 95% mortgages, another thing Rishi Sunak has done to help boost property sales and help out first time buyers is to extend the Stamp Duty holiday.

Stamp Duty is a type of tax buyers have to pay for the land they are purchasing, which has been scrapped for houses under £500,000 since last summer due to the ongoing pandemic.

Sunak announced in his budget that this tax break will continue now until June 30 2021, before changing slightly to ease buyers back into it. So from June 30, there will be no Stamp Duty on properties under £250k, and then from September, it will return to its normal rate of no tax on homes under £125k, but anything above will return to paying.

However it's worth noting that first time buyers will get a discount or complete relief on their Stamp Duty payments from July 2021, if your house costs less than £500,00.

The Stamp Duty holiday can save buyers up to £15k.