Buying a first home is an exciting prospect. Many dream of getting onto the housing ladder and leaving their rent paying days behind them.
But with property prices rising, saving enough money for a deposit can feel like an impossible task.
According to the UK house price index, the average house price in the UK in June 2020 was £237,834.
Saving a 5% deposit for a property of this value would mean squirreling away nearly £12,000, a significant sum by anyone’s standards and for many, this would take years of hard saving.
But even if you have managed to stash away a 5% deposit, you may be wondering if this is enough to buy your first home?
The good news is, yes, it is. What you’ll need to look for is a 95% LTV mortgage.
If you’re a first time buyer with a 5% deposit, you will need to borrow the remaining 95% from a bank, building society or other lender in the form of a mortgage loan.
This gives you a loan to value (LTV) ratio of 95%, which is calculated as how much you need to borrow, divided by how much the property is worth and multiplied by 100.
So, if you wanted to purchase a property costing £250,000 and had £12,500 to put down as a 5% deposit, you would now need to find the remaining 95%, or £237,500.
237,000/250,000 = 0.95
0.95 x 100 = 95%
This means you would need to search for a 95% LTV mortgage.
Needing a 95% mortgage as a first time buyer is a relatively common situation. And having this 5% deposit means you can access much more competitive deals than those with no deposit to put down, who are looking for 100% LTV mortgages.
Taking out a first time buyer mortgage with a 5 percent deposit also gives you some protection against going into negative equity. This is where a property loses value, resulting in the homeowner owing more money than the property is worth.
Try using this mortgage calculator to see how much you can borrow.
While saving enough for one of the 5% deposit mortgages for first time buyers can seem a daunting prospect, you may be pleasantly surprised to find help is available.
There are a number of Government Help to buy schemes, which can help you buy a property with shared ownership, or even buy a new build home with an equity loan.
Bigger deposit, cheaper mortgage rates
Of course, the bigger your deposit, the happier lenders tend to be.
Mortgage providers group their products into LTV bands, and the interest rates get cheaper, the lower down the bands you go.
This is why the very best mortgage rates are saved for those looking for mortgages with a maximum LTV of 60% or lower. This means they have a deposit (or equity) of 40% of the property’s value to put down, making them less risky to lend to.
As 90% LTV mortgages tend to have cheaper interest rates than 95% LTV mortgages, it is well worth seeing how close to the next band your deposit takes you.
It could be worth saving a little more if this means you would drop down a band. Not only could you reduce the interest you pay over the term of the loan, you’ll find there are a lot more 90% LTV mortgage products on the market to choose from.
One way to boost that all important deposit can be by trying to increase how much you can save each month.
If you haven’t already done so, consider opening a Lifetime ISA. This scheme allows savers to deposit up to a maximum of £4,000 each year, until you turn 50. The government will then add a 25% bonus to your savings each year.
So, if you save £4,000, the government will top it up to £5,000. The proviso is, the money must be used to buy your first home, making it a no brainer for any first time buyer.
Creating a budget and sticking to it, reducing spending and switching energy providers can also save a surprising amount of cash.
Cutting down on eating out and takeaways and brushing up on your cooking skills can help your bank account as well as your health. And cancelling that gym membership and exercising using free fitness apps, or going for a run in your local park can be very effective ways to save some vital cash.
Numerous banks are also offering cash to new customers, so you could consider switching current account. And of course, remember to move your savings to a better paying account if yours is falling short.
Of course, being approved for 5% mortgages as first time buyers takes a little more effort than just asking a bank to lend you the remaining 95%.
Lenders require borrowers to provide proof of income, as well as details of their outgoings, before deciding how much they are willing to lend, so it is worth having bank statements and a monthly budget ready to submit.
They will also carry out a credit check on prospective customers, so apply for a copy of your credit file yourself beforehand to make sure there are no anomalies that might affect your report.
You can find out more about how to improve your credit score in this article.
There are a number of different types of first time buyer mortgages for 5% deposit available.
Firstly, you will need to decide if you would like a repayment mortgage, which is where you chip away at the mortgage debt and interest each month.
Alternatively, you could opt for an interest only deal, where your payments are smaller but only used to pay off the interest, which means you will need to be saving elsewhere to pay off the loan itself.
For most first time buyers, a repayment mortgage is simpler and the preferred option.
Now you choose a mortgage type:
A fixed rate mortgage is a home loan that charges a fixed rate of interest for 2, 5 or 10 years.
Fixed rate mortgages are not usually the cheapest option, but they are unaffected by fluctuating interest rates. So, if the Bank of England base rate rises, you can feel secure that your mortgage payments will not be affected.
Unsurprisingly, this is the type of mortgage a lot of first time buyers choose, preferring this security as it allows you to budget effectively at a time when money may be tight.
Variable rate mortgages, on the other hand, are affected by interest rate changes.
They are either linked to the lender’s Standard Variable Rate (SVR) or track the Bank of England base rate (in the case of tracker mortgages).
If the base rate goes down, your mortgage rate will fall and you’ll benefit from cheaper monthly payments.
However, if rates go up, so too will your mortgage rate, meaning your payments increase.
There are many different types of variable rate mortgages. Discounted variable rate mortgages offer a discount on their rate for a period, and capped rate mortgages prevent your rate rising above a certain threshold or ‘cap’.
Variable rate mortgages often have cheaper interest rates than fixed rate deals, and are particularly attractive at the moment with the base rate at just 0.1%.
However, you must be prepared for rates to rise and know you could still make your mortgage payments, even if they should increase by 1% or more. For this reason, if you choose a variable rate mortgage, you should ensure you have some savings accessible.
Once you’ve decided which type of mortgage to go for, you’ll need to decide on the term. Most 95% mortgages for first time buyers can be taken out over a 2, 5 or 10 year period.
If rates are low it could be worth locking yourself in for longer. But if you think rates could go lower still, a two year mortgage will mean you can remortgage in 2 years for a (hopefully) better deal.
Whichever term you choose, remember that when it ends, your current rate will end, and your borrowing will be transferred to the lender’s SVR mortgage rate. As this is likely to be a percentage point or two above what you are paying, be prepared to search for a better deal three months before your mortgage term ends.
Interest rates are not the only thing you need to watch out for. Most lenders will charge some form of arrangement fee for taking out a mortgage product which can be eye wateringly high, so remember to take this into account. You may also be charged a Higher Lending Fee (HLC) if your deposit is under 10%.
Arrangement fees will often be added to your mortgage loan, the disadvantage being that you will be charged interest on this extra borrowing too, over the course of your loan. If you can, try to pay any fees separately.
How to compare 95% mortgages for first time buyers
Lenders, of course, tend to charge their fees in different ways, making it difficult to compare one mortgage product to another.
For this reason, it can be helpful to search for mortgages via a comparison website such as Bankrate.
Not only do comparison sites lay out similar products in a table, they list the maximum LTV applicable, any charges and also include the APRC (Annual Percentage Rate of Charge) which tells you the total cost over the entire term of the deal. All of this information can help you decide which is the best mortgage product for you.
Of course, this can be quite daunting for a first time buyer, in which case it can be worth paying for some advice. By speaking to a mortgage broker, you can benefit from their expertise and decide between you on the best product for your needs. However, do ensure that you understand how they charge for their advice.
With the coronavirus (COVID 19) pandemic having paralysed many areas of the economy, 95% mortgages for first time buyers were unfortunately one of its victims, with many lenders removing their 95% LTV and even 90% LTV products from the market.
Thankfully, in the last few months some 95% percent mortgages for first time buyers have come back onto the market, and the numbers will hopefully continue to grow.