A 95% mortgage is a mortgage where you provide a 5% deposit up front, and the value of the loan covers the remaining 95% of the property price.
It has a 95% loan-to-value (LTV) ratio - the LTV ratio describes how much you are borrowing in relation to the price of your house.
For example, if you borrow £95,000 for a house costing £100,000, then your loan-to-value ratio is 95,000/100,000, or 95%.
With a 95% mortgages, you pay a deposit worth 5% of the property value. The mortgage lender then loans you the remaining 95%.
You will repay the 95% loan over the full term of the mortgage, alongside interest payments (the interest rate will depend on the deal you get then, and what you remortgage to once your initial deal ends).
For a property costing £150,000 you'd need £7,500 for a 5% deposit. Your lender would then lend you £142,500 to cover the remaining 95%.
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A 95% LTV is typically a popular option for first-time buyer mortgages as it's more manageable to save up a 5% deposit for a property, than a 10 or 15% one.
This helps first-time buyers get on the property ladder faster - saving a larger deposit might delay this by a few years. There aren't as many 95% mortgage options as there are for lower LTV products though, so some buyers may still prefer to save a bit longer.
If you're moving home and the equity you've built up in your current home amounts to 5% of the value of the property you're moving to, you might opt for a 95% mortgage.
However, you may also want to add your savings to the deposit or build up bit more equity, so you can get a lower LTV ratio and therefore access to better mortgage deals.
It's not particularly easy to remortgage to a 95% mortgage deal. Most lenders would have expected you to build up more equity if you already own a property.
You may be better aiming to remortgage at a higher LTV or speaking to a mortgage broker who can advise on the best options available to you.
The loan-to-value ratio is a huge factor for lenders to decide how much they can lend you, and at what rate.
If you borrow more in relation to your house value then you are a higher risk for the lender, as there’s more for you to pay back.
That also means there’s more risk for you, the borrower. The more you borrow, the more you have to pay back and, crucially, the more interest you will eventually pay over the lifetime of the mortgage.
Eligibility for 95% mortgage deals is similar to lower LTV mortgages, with the same affordability criteria applied that lenders will be looking for so that they can be confident in your ability to make repayments.
A prospective lender will assess your income, as well as reviewing your expenses and any debt you owe before deciding whether or not to offer you a mortgage. Your credit history will affect your ability to borrow too, with a good credit score increasing your chances of access to a better mortgage interest rate.
Due to the risks involved for lenders, during the COVID-19 pandemic, 95% LTV mortgages weren't generally available. However, 95% mortgages saw a resurgence in April 2021 due to the government has launched a new 95% mortgage guarantee scheme to increase the availability of these mortgages on the market.
Under the scheme then the government will guarantee the amount borrowed over 80% to reduce the risk for lenders and encourage banks to offer more high LTV mortgages.
However, the scheme is ending in December 2023.
How much you can borrow from a mortgage lender depends on your affordability.
A lender will generally base your borrowing amount on your annual income – you can normally borrow around 4-4.5 times this.
However, they will also look at your outgoings to determine whether you can afford the repayments. That's why it's often a good idea to check in on your spending habits three to six months before applying for a mortgage.
Lenders will also review your credit history to check whether you can reliably manage debt. It's worth checking your credit score before you apply and trying to resolve any issues, including errors on your report.
If your score is lower than you expected, you can also take steps to build it, like using a credit card for small payments and always repaying on time, or registering on the electoral roll (if you haven't already) as lenders see this as a sign of reliability.
Claire Flynn, Senior Content Editor - Mortgages
While a 95% mortgage deal allows you to get on the property ladder faster, if you're able to save a larger 10% deposit, you'll typically have a better selection of rates and deals to choose from. ”
If you're not sure if a 95% mortgage is for you, learn how to compare our best mortgage rates or take a look at some of the other LTV mortgage options below.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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