Property The 95% mortgage is back - but consider ALL your costs

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Whilst the recent mortgage guarantee scheme initiative didn't have the direct impact the Government may have hoped for, it seems to have given some lenders the confidence to relaunch 95% mortgages.

I have been surprised by the number of enquiries I’ve had recently for 95% mortgages and I'm pleased to say that lenders seem willing to put their money where their mouth is.

In the past, lenders claimed to have 95% mortgages available, but the credit score required to get an agreement at that level was unrealistic for the people that wanted them - often young, first-time buyers. It is hard to get a top-level credit score if you are young and have never had a mortgage.  

Several of the main players in the market such as Santander, Halifax and NatWest are now offering 95% mortgages but often the value is with smaller, less well known lenders.

This level of lending is giving more first time buyers the chance to get on the housing ladder which is great news for them, but I always caution clients to consider all the costs before they rush into a purchase.

The example costs below are for a typical London first time buyer client.

Mortgage

The prices below are based on a rate of 3.59% fixed for two years which is a deal currently on sale today. The product comes from a slightly lesser known lender. It has no booking fee and for a limited time free valuation survey which is rare but makes it a hidden gem only a good broker will know about.

Example costs of a 95% capital & interest mortgage on a £500k purchase price
Term Deposit required Loan amount Stamp duty Monthly cost
25 years £25,000 £475,000 £15,000 £2,400
30 years £25,000 £475,000 £15,000 £2,156
35 years £25,000 £475,000 £15,000 £1,987

Typically, first time buyers can borrow up to 4 - 5 times joint net salary. The net figure is achieved by looking at outgoings including monthly costs of loans, credit cards, student loans and child maintenance. Some lenders also look at pension contributions and child care costs.

Read our blog How Much Can I Borrow? for more information on this. 

Generally, 95% mortgages are not available against new build flats unless a client intends to use the equity loan scheme.

I have assumed this will be the only property the client will own. If this is not the case, higher stamp duty charges may apply. 

Solicitor

These costs are from a solicitor that I often refer my clients to.

To buy a freehold property the cost is typically £1,385 and for a leasehold property, £1,775. The solicitor generally collects the stamp duty from the client too. There should be no hidden extras. 

Other costs

The other main costs to consider when buying a home are valuation/survey costs (free in this example but not always and can range from £400 to £700), legal fees and product fees which are typically £999 but again free in this example. Clients may also need removal services and this can vary greatly but assume £1500 for a larger firm or £500 for a man with a van.

Life cover

For many clients, the cost of moving mentally stops here. However, a good adviser should be talking to you about the importance of protection. Having seen the devastating effects of losing a bread winner or home maker unexpectedly, it is something I always factor into a conversation with a client. Clients often feel the cost of cover is unaffordable, but it’s often less than their monthly SKY TV bills.

The table below shows example costs for life cover for a non-smoker, sum assured £500k over a 35 year term (payable on death or diagnosis of terminal illness). Life cover only. Level cover and guaranteed premium.

Example monthly life cover costs
Age at time of application Cost per month
25 £16.27
35 £31.53
45 £77.46

As you can see, the costs of cover for your average city worker who is a non-smoker are fairly minimal in the grand scheme of things. Level cover means the sum assured of £500k will never decrease over the next 35 years despite your mortgage balance going down with each payment you make and guaranteed premiums mean the price quoted in the final column will never increase over the 35 year term. The beauty of life cover (and critical illness cover if client has the budget) is that it can be tailored to suit any client needs.

If you are thinking of getting onto the ladder and you have 5% deposit (or Bank of Mum and Dad can give you 5% deposit) then now is a great time to pick up the phone and talk to an independent adviser. You can also download my free first-time buyers guide here.

David Baker – Latest Blog Posts

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