Are 95% mortgages bad?

Lilymoza

Hi, 
Clearly this is not relevant at the moment as banks are not offering 95% mortgages due to covid. However I was wondering whether anyone could clear something up for me.
Myself and my partner have been renting for a couple of years, we have saved a considerable amount however still cant afford to put down a 10% deposit on a house in the area we are looking at. If we saved till the end of the year, we would have enough for a 10% deposit, however it pains me thinking of putting that much cash down if 95% mortgages become available again. 

I understand that my monthly mortgage payment would be higher with a 5% deposit than a 10%, but this isn't much of an issue as we have already been paying out rent in addition to saving, so would be better off even if the payment was very high. I also understand that you are more likely to be in negative equity, which again I don't think would be an issue as we plan for this to be our "forever home." 

I have friends that are all putting a lot of money down as their deposit (mostly due to covid meaning higher LTV's aren't available) and understand their reasonings, but would I be silly to not put as much money as I possibly could down?

Carrot007

A higher mortgage leads to more risk. That is all.

Back when they did them I took a 115% (? cannot remember the right figure) mortgage. And it was the right thing. Got the place for a bit over 1/3 of what it was worth, if it was modernised. Spent a year doing that. And yes the 15% was not enough but after doing it I took an extra drawdown which was still a mortgage of a lot less than it was worth. Or course the mortgage company just had to go on me saying I would do such things. Lot's of people used them to go on holidays, which is why they are no longer available. Maybe they should still do them as they serve a purpose. But what's in it for the offerer ? Not much in the current market. Back then they just took the though the market is increasing enough that even if they had to reposess they would probably get most of it back. And of course you would still owe any shortfall but they might never get it.

I guess it all comes down to what X% measn to you relative to your wage. But that again is not the banks problem. Many nicer and cheaper areas exist if you go looking for them.

Thrugelmir

House ownership comes with additional costs. You might welcome that additional money in your pocket with a lower monthly outgoing once you've a foot on the ladder. 

[Deleted User]

Totally agree with this view; unexpected things happen all the time.
This week i have to pay out for work done on my cars engine - can definitely do without that this week 😣

RelievedSheff

A 95% mortgage is going to be at a higher interest rate than a 90% mortgage which in turn will be at a higher rate than a 85% mortgage and so on.

The more money you can put down as a deposit the lower your interest rate will be and the more you will save in interest.

Carrot007

Lilymoza said:

which again I don't think would be an issue as we plan for this to be our "forever home."

Knew I forgot something!  Saving a deposit is why most people's first home is not their forever home. But it could work becuase of cvourse you can remortgage later.

However you will find a reason to move and unless you first home at 95% is around half of the maximum the bank will lend you then you are probably pushing yourself too far. None of my mortgages have been anywhere near the top of what the bank say they would go to. It is much more important is you are pushing the LTV as well.

blue_max_3

Forever is a long time! You mention renting for a couple of years. I take it you are young?
Not many people find their 'forever' home in their early twenties! 

RelievedSheff

Not many people try to find their forever home first time round. The first time home is usually a cheaper starter home, a foot onto the ladder.

We ended up staying in our first bought home far longer than expected, it was supposed to be for a few years, we ended up there for 12 years due to unfortunate timing and house prices dropping leaving us in negative equity for a long while. But we still had a home to call our own.

We were glad to move last year though and this house is intended to be the forever home.

AnotherJoe

Lilymoza said:

Hi, 
Clearly this is not relevant at the moment as banks are not offering 95% mortgages due to covid. However I was wondering whether anyone could clear something up for me.
Myself and my partner have been renting for a couple of years, we have saved a considerable amount however still cant afford to put down a 10% deposit on a house in the area we are looking at. If we saved till the end of the year, we would have enough for a 10% deposit, however it pains me thinking of putting that much cash down if 95% mortgages become available again. 

This makes little sense. As you pay the mortgage off Each month you are putting even more cash down every month, until you've put so much cash down that you own the house.
 Why therefore does it pain you to put "so much" cash down when it's only an extra 5% and you will be putting that cash down anyway via the mortgage since there's still 90% more cash down you'll have to find? 

Seems to me you've forgotten the point of a mortgage and are treating it like rent. You end up putting lots and lots of cash down over the years ! Yet don't seem bothered by paying even more as long as it's less then  rent. 
And as said, that extra 5% will significantly drop the interest rate. Yet you act as if it's all for nothing and could have "got away" with just 5% if 95% mortgages came back whereas it will lower the interest rate and thus enable you to own the house quicker, pay less interest which is lost money to you,  plus reduce the chances you will get into negative equity. 

Also I'm sceptical  that someone just starting out on their first mortgage is buying their "forever house " - statistically the odds are definitely against you. 

getmore4less

95%  mortgages are not bad in themselves but can be for some if they get the numbers wrong.
Cost is a big downside as the best rates(for good LTV) at the moment are well under 1.5% and a 95% is going to be closer to 3% (existing borrowers are getting 2.5% on 95%)

Over 30 years a 95% mortgage is around £400 per £100k house value
After 5 years and no price movement you are going to be at 85% LTV (2 years 91%)

The person that borrowed the same amount on a 1.25% rate and paid the 95% mortgage rate would be £8k/£100k better off after 5 years. 

on a 20y term £530pm/100k  you can be close to 75% LTV after 5 years ( 2 years 88%)
on a 40y term the numbers become £340pm  88% 93%


The key is the exit strategy if you are stretched need a long term then you are stuck on the high rate for a long time.

If  free cashflow is OK but the struggling point is the deposit then getting in at 95% but a decent payment(shorter term/overpayment) gets you on the lower rates quickly. 
For some it may start out tight but the jobs have predictable pay increases so you know that you have the exit that way.

Keeping cash back for development that improves LTV is another exit strategy

If looking at new then there is HTB that can work well in  flat/falling market as you get a better rate on your debt and 20% interest free for 5 years.