5% Deposit Mortgages
Saving enough deposit for a mortgage is one of the biggest hurdles to home ownership. Whilst most lenders typically ask for a minimum of 10% deposit, there are lenders on the market that are happy to accept just 5% deposit.
With a 5% deposit, you will take out a mortgage with 95% Loan to Value (LTV). This means that your mortgage will cover 95% of the properties market value and your deposit will cover the remaining 5%.
Am I eligible for a 5% deposit mortgage?
There are several factors that lenders will consider when deciding whether they are happy to offer you a mortgage with 95% LTV:
The smaller your deposit, the larger the risk your mortgage is to the lender so with a 5% deposit, lenders will want to see that you have a good credit history and are responsible in managing your finances. If you have a missed payments or a poor credit history, it is worth spending at least 6 months improving your credit score before applying for a 95% mortgage as even making one late payment on your credit card may show up on your credit profile.
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Lenders will want to do a full affordability assessment to check that you can afford and maintain monthly mortgage repayments on a 95% mortgage. They’ll want to see details of your income, expenditure, as well as any details of and bills and debts you have.
What benefits are there to a 5% deposit mortgage?
The clear benefit is the low deposit requirements meaning that you may be able to purchase your home much sooner.
What are the potential pitfalls of a 5% deposit mortgage?
Generally speaking, the lower the deposit, the higher the mortgage interest rate meaning you will end up paying more in interest over the term of your mortgage than if you’d have put down a higher deposit.
Another potential risk is that if property prices decrease you may end up on ‘negative equity’, This means that you may end up owing more on your mortgage that what your property is actually worth. If you are planning on remaining in the property long term, this may not be an issue as historical data shows that even if property prices decrease, they will always increase eventually However, it something to seriously consider if you are considering moving in the not too distant future.