In recent years, rising house prices have made it difficult for many young people to get onto the property ladder. According to figures from the Office for National Statistics, published in the Guardian, one in three millennials are expected to never be able to afford their own home.
To remedy this, the government are seeking to increase the number of high loan-to-value (LTV) mortgage products available for prospective buyers. While these can be helpful for people who can’t afford a large deposit, there are also some drawbacks.
A mortgage is a significant financial commitment, so it’s important to be able to make an informed decision. Read on to find out what a 95% LTV mortgage could mean for you.
Taking a higher LTV mortgage means you would need a smaller deposit
As the name implies, the loan-to-value (LTV) ratio of a mortgage is how much a lender is willing to give you compared to the value of the asset. For example, if a lender provides a loan worth half the value of the asset, its LTV ratio would be 50%.
The obvious benefit of higher LTV mortgages is that you would need a smaller deposit in order to secure it.
The cost of a mortgage deposit is often one of the biggest obstacles for many buyers. This is particularly true for first-time buyers, who tend to be younger and so haven’t had as much time to build their wealth.
The government is encouraging high LTV mortgages to promote home ownership
As you may have read in our Budget summary, the government has announced a scheme to get more young people onto the property ladder by encouraging lenders to offer a greater number of high LTV mortgages.
The way they hope to do this is by giving mortgage guarantees, thereby lowering the risk to lenders. This move was aimed at helping young adults, many of whom struggle to afford a larger deposit, to enter the housing market.
According to data from HM Land Registry, in January the average house price in the UK was £249,309. This means you would only need a deposit of £12,465 if you got a 95% LTV mortgage, which is much more affordable for young buyers.
With a higher LTV mortgage, you may have to pay higher interest rates
While the scheme may make deposits more affordable, it does also come with some drawbacks. One is that, due to higher interest, you may end up paying more over the long term.
As the LTV ratio increases, so does the risk to the lender as more of their money could be lost if you cannot repay the loan. Lenders typically charge higher interest on higher risk loans to compensate for this risk.
What this means for you is that while it may be easier for you to afford the deposit, you would be paying more interest on a larger sum than if you took a lower LTV mortgage. In the long term, this may add up to a considerably larger amount of money than if you had saved up for a larger deposit.
Admittedly, it can sometimes be difficult to judge what the best LTV ratio for you would be, which is why you may benefit from seeking professional advice. A financial adviser can help you to thoroughly weigh up your options to help you determine the right decision for your long-term financial wellbeing.
To take out a 95% LTV mortgage you will need to meet some criteria first
Access to higher LTV mortgages can be a boon for younger buyers who need some help getting onto the property ladder. However, there are some criteria that you would need to meet in order to qualify for this scheme.
For a start, since the scheme is aimed at first-time buyers, there are a number of restrictions on the property you can buy.
If you want a 95% LTV mortgage, you must be buying a main residential home in the UK, so you cannot use the scheme to buy a second property or as a buy-to-let landlord.
Furthermore, the property must also be worth £600,000 or less. While this may seem much higher than the price of the average home in the UK, you should bear this limit in mind if you’re hoping to buy a home in an expensive location, such as London.
It’s also important to note that the scheme is only available for repayment mortgages, not interest-only.
Finally, you will need to meet the usual checks with the lender to ensure that you can actually afford the monthly payments.
A mortgage is a significant financial commitment, which is why you may want to seek professional financial advice before taking one out to ensure that it’s the right decision for you.
Get in touch
If you want to know more about whether a 95% mortgage would be right for you, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
