95% Loan to Value (LTV) Mortgages are Back!

Some of the biggest banks in the UK have signed up to the scheme and will from April offer 95% LTV mortgages. A number of lenders have already launched low deposit mortgages without the support of the government’s scheme and there is an expectation that more lenders will follow. Increased competition should provide borrowers with more choice, greater flexibility and hopefully (eventually) more competitive interest rates.

The mortgage guarantee scheme which is due to run from April 2021 to 31 December 2022 will see the government ‘guaranteeing’ 95% mortgages for buyers with 5% deposits. Under the terms of the scheme, the government will guarantee the portion of the mortgage over 80% (so, with a 95% mortgage, the remaining 15%).

Lenders who offer regulated mortgages to home owners are eligible to participate in the scheme. Under the terms of the scheme, participating lenders will need to offer a five-year fixed-rate mortgage as part of their mortgage range. There is an anticipation that some of the high street banks will participate in the scheme.

The mortgage guarantee scheme is open to all home buyers, whether you’re a first time buyer, 2nd stepper or downsizer. You’ll need to be buying a property to live in yourself – second homes and buy-to-let properties are not permitted. Both new-build and existing properties priced up to £600,000 are eligible. You’ll need to apply for a repayment (not interest-only) mortgage and pass standard lender affordability checks, including a loan-to-income (“LTI”) test and credit score assessment.

Under the government scheme lenders are required to offer 95% mortgages within set criteria. Where lenders prefer to set their own parameters they must do so outside the scheme. A number of lenders (outside the scheme) have already launched their offering with their own criteria such as:

• 95% LTV mortgages only available to first time buyers;

• certain properties to be excluded such as new builds, flats; and

• restricting LTI limits or the actual loan amount (thereby restricting the property value to below £600,000)

It’s important that you fully understand the potential risks of a high LTV mortgage:

• If your property drops in value the size of your mortgage could be higher than the value of your property i.e negative equity.

• Generally the higher the LTV the higher the rate of interest you’ll pay on your mortgage.

• Currently 95% LTV lenders are only offering 5 year fixed interest rate products on a fully repayment basis, therefore your monthly payments are likely to be higher compared to interest only mortgage products.

• Committing to a 5 year fixed initial term mortgage means that If your circumstances change during that time and you need to repay the mortgage there are likely to be significant early repayment charges (“ERCs”).

Example

Detailed below are the 5 year fixed rate mortgage options for a home purchase of value £500,000 at 95% and 90% LTVs from the same lender:

Loan to value	95%	90%
5-year fixed interest rate	3.99%	3.29%
Lender arrangement fee	£995	£1,500
Monthly payments	£2,509.85	£2,209.78
ERCs	5% to 1%	3% to 0.75%
Information correct as at 15 April 2021

This lender will also offer a 2-year fixed rate mortgage option for a 90% LTV mortgage at 2.99% and £1,500 lender arrangement fee.

There are some other options that can help you buy a home with a small deposit:

• The Help to Buy scheme offers between 5% and 20% equity loan (40% in London) from the government on new-build properties in England. From April, it will be limited to first-time buyers and regional price caps will limit the cost of homes sold under the scheme

• The Shared Ownership Scheme could offer you a route on to the ladder. These schemes involve purchasing a stake of as little as 25% of a property and paying ‘rent’ on the remainder. You will have the option to buy the remainder of the property at a later date

• Some lenders currently offer a range of guarantor mortgages, which allow a parent or family member to help you buy a home. Guarantor mortgages usually involve the family member using their home or savings as collateral in case you default on your mortgage, but innovative products such as 'joint borrower sole proprietor' mortgages could be an alternative for some.

The emergence of low deposit mortgages is welcome relief for borrowers as their mortgage options will broaden. Over time as more lenders enter this market, competition may drive down the interest charged. For borrowers it’s vital that they understand all the options available and select the mortgage that meets their financial circumstances.

^{*The views expressed are the author’s and not ICAEW}

If you are currently looking for a residential mortgage or to refinance your existing mortgage and would like to discuss your personal position please contact the Kinnison team on our website or directly at our email address.

^{Your home or property may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.}

^{Through our partnership with the ICAEW we have a dedicated mortgage advisory service for ICAEW members, through Kinnison Limited, offering our bespoke service at a significantly discounted fee structure.}

^{For mortgages below £750,000 our typical fee is £498 (£199 payable on application and £299 on completion). For more complex cases and mortgages above £750,000 our typical fee is up to 0.6% of the mortgage amount. Of this, 20% is payable when you receive your mortgage offer and the balance of 80% on completion. For example on a mortgage application of £800,000 the fee would be £4,800 in total. Of this, £960 (20%) would be payable on issuance of your mortgage offer and the balance of £3,840 (80%) on completion. The total fee is non refundable. We may also be paid commission from the lender.}

^{These fees apply to mortgages regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate most buy-to-lets, commercial lending and some bridging finance. Fees for non-regulated mortgages will vary depending on your requirements and individual circumstances.}

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The information contained within this document is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK. Kinnison Ltd is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
Kinnison Ltd. Registered office: 91 Wimpole Street, London, W1G 0EF, United Kingdom. Registered in England & Wales No: 09582749}