The number of lenders offering 95% mortgages has risen in the past two years – but are such mortgages really a good option for home buyers?
At the beginning of 2012, there were just nineteen deals from various lenders that offered 95% mortgages. That number has risen to 58 at present and some of the offers come from the UK’s largest lenders.
Simply put, a 95% mortgage allows the prospective home buyer to be granted a loan with just a 5% deposit. This is certainly an attractive concept, but there are also other features that need to be taken into consideration.
For such a loan, a guarantor is necessary, which will often fall onto a parent or parents, or grandparents, who will be obliged to pay should the buyer be unable to do so. This could see them paying anywhere between the full loan to covering the top 20%. The interest on the mortgage will also be higher than other deals, being as high as 5% or 6%.
And ultimately a mortgage is a loan that needs to be repaid, so a higher deposit can result in better mortgages that can be paid off more quickly or result in lower payments per month.
But Options for Home Buyers are Limited
Since the 2007 banking crisis lenders have had less money to give out and have been very cautious about to whom they lend. An even more perfect credit rating than usual is necessary to secure a 95% mortgage, as under banking rules a smaller deposit leads to a more risky loan. But this reluctance negatively impacts first time buyers especially who aren’t always able to pull together the sometimes dauntingly large deposits for a house.
Help at Hand?
The number of people taking the 95% mortgage option may just rise this year, however, due to the Government’s New Buy scheme. This will include some of the top banks, giving them the room to lend the 95% rather than the usual 80-85% on newly built flats and houses around the country. It is hoped this will benefit both the building industry and new first time buyers.