What is a 95% LTV mortgage?
The loan-to-value, or LTV, is a crucial part of any mortgage. It dictates how big the mortgage can be in comparison to the overall value of the property you are buying.
So a 95% LTV mortgage is one in which you can borrow 95% of the value of your home, meaning you only need to put down a 5% deposit.
Why is mortgage LTV important?
Mortgage lenders tend to take a tiered approach to their range of products. So, there may be certain products that are available for up to 60% LTV, some products that are available for borrowers who want to borrow up to 70% LTV and others for those looking for up to 80% LTV, and so on.
As you move up those LTV tiers, the products tend to become more expensive as you are taking on more debt. That may mean higher interest rates, higher product fees, or both. Effectively, your mortgage will cost you more if you can only put down a small deposit. This is because, with less of a stake in your property, you are perceived as higher risk by the lender.
Are 95% mortgages available?
There are always more mortgage options open to you if you are borrowing at a lower LTV. If you are looking for a 60% LTV mortgage, for example, there will be plenty of lenders to choose from.
This isn’t the case for borrowers with only a small deposit, with fewer lenders providing deals above 90%. In fact, the pandemic has caused lenders to become even more cautious about lending to these borrowers to the point that there are very few deals around or above 90% LTV.
That’s why the government launched a mortgage guarantee scheme in April 2021, which covers a portion of the losses incurred on mortgages offered between 91% and 95% LTV should the borrower fall behind on their repayments to the point that the lender has to repossess the property.
The idea is that this will make these deals less risky to offer for lenders, and hopefully become more common. A similar scheme announced by the coalition government back in 2013 worked in much the same fashion.
Pros and cons of a 95% LTV mortgage
The big positive of a 95% LTV mortgage is pretty simple ‒ it means that you can purchase a property with a modest deposit of just 5%. This may mean that you get onto the property ladder much quicker than if you are forced to save for longer in order to put together a more substantial deposit.
However, there are some clear downsides to 95% LTV mortgages. The first is availability. There simply aren’t many lenders who are willing to take on the level of risk that comes with a 95% LTV mortgage, so you don’t have many deals to choose from. It’s because of this that the government has launched the mortgage guarantee scheme which it believes will boost the number of 95% LTV mortgages on offer.
You also need to consider the interest rate. Generally, lenders charge higher interest rates as the LTV increases ‒ you’ll pay a higher interest rate on a 90% LTV mortgage than on an 80% one, for example. That higher interest rate means that the size of your monthly repayment is larger, and that paying the loan off entirely will cost you more overall.
Finally, there is greater risk of negative equity. This is where the size of your outstanding mortgage is greater than the value of the property, which can make it difficult if not impossible for you to remortgage or move home. Buying with a small deposit means that the value of your home only needs to fall by a relatively small amount to leave you in negative equity.
» MORE: Current mortgage rates
How can I find a 95% LTV mortgage?
A host of lenders announced that they will offer 95% LTV mortgages following the launch of the mortgage guarantee scheme in April.
You can shop around and apply to lenders directly, alternatively, you might prefer to use a mortgage broker. A broker is an independent adviser who can talk through your circumstances to help you establish what type of mortgage will be best for you and advise you on which lenders are most likely to look favourably on a mortgage application from you.
What’s more, some lenders only offer their deals through intermediaries. These lenders may join the scheme later on, so using a broker may mean you enjoy a greater range of options. However, brokers often charge a fee for their advice, so that’s an additional cost to bear in mind.
» MORE: First-time buyer mortgages
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The loan-to-value (LTV) ratio is your mortgage amount expressed as a percentage of the current value of the property being bought or remortgaged. The bigger your deposit or the equity you’ve built up in your property, the lower your LTV and the better the mortgage rates you may find are available to you.
The smallest deposit that you can buy a house with currently is 5%. A more common ‘low’ deposit is 10%, as borrowers have far more options if they are looking to borrow 90% of the property’s value, or LTV.