Two people with boxes moving into their new home

95% LTV Mortgages are back – Are they a good idea?

The budget announcement from chancellor Rishi Sunak earlier this month helped shed some light on how the UK government is planning to recover from the effects of the Coronavirus pandemic.

Those of us in the mortgage industry naturally kept a close eye on that which affected the housing market. One of the standout points was the announcement of a new initiative to support 95% LTV mortgages.

So now the dust has settled after the budget announcement, what are the logistics of this initiative? Does a 95% LTV mortgage represent a good deal for contractors and freelancers seeking a new home? 

What is a 95% LTV mortgage?  

Just so there’s no confusion, LTV stands for Loan-to-Value and means the percentage of a property’s value that you can cover by taking out a mortgage. 

A 95% LTV mortgage means you only need to put down a deposit worth 5% of the overall value of the property to secure the property.

So if you were able to secure a 95% LTV mortgage deal on a house worth £200,000, your deposit would only need to be £10,000. 

What did the government announce during the budget?

Sunak’s budget announcement disclosed some basic information regarding this new initiative, which will see the government offer guarantees to cover 95% LTV mortgage deals for major lenders.

Typically, lenders will want a higher percentage covered by the deposit. This essentially gives them confidence that you have the financial clout to keep up with payments consistently. But the new initiative offers security for lenders thanks to the government guarantee, meaning they are far more willing to commit to such mortgages knowing they are covered if things go pear shaped for the applicant down the line.

The initiative is obviously a move to try and galvanise the housing market and get more people owning their own homes. A number of lenders were reported to by launching such mortgage offerings, including the likes of HSBC, Lloyds, NatWest, Barclays and Santander.

The initiative is set to launch next month, and some further lenders have announced their 95% LTV deals this week, including the likes of Accord and Bank of Ireland.

The government ran a similar scheme back in 2013, and more than 100,000 95% LTV mortgage deals were completed. A significant proportion of these were first time buyers, meaning that getting more people on the property ladder – one of the scheme’s main aims – was firmly achieved.

Is a 95% LTV mortgage worthwhile?

The idea of putting a relatively small deposit down on a property is bound to sound appealing to anybody struggling to save up big amounts. It also leaps out as a quick way to secure that dream home, and could enable you to upgrade to a larger property than you may previously have been in the market for. 

But there are a few things to consider when it comes to a 95% LTV mortgage. Don’t be surprised if those mortgages which are supported by the government scheme come with higher rates. This means that while your deposit might be comparatively low, you could find yourself with higher repayments than with other deals in the long run. 

Another problem could arise if house prices fall substantially. Buyers could find themselves in negative equity, where they owe more than the overall value of the house. That’s something of a hypothetical situation, but it’s certainly not an impossibility.

However, if you are super keen to get onto the property ladder as soon as possible, then a 95% LTV mortgage is certainly an avenue to explore.

What’s the best approach for me?

Each mortgage applicant is different, but generally speaking, the more you can put down as a deposit, the better. Lower repayments is a benefit in the long run, and you might well be able to secure a stabler mortgage if you put more down early on.

But the return of 95% LTV mortgages for any contractor or freelancer seeking their first home opens up a number of new options. This initiative and the range of lenders committed to it could be exactly the situation required to get that deal for your first home over the line.

There are risks if the market takes a turn for the worst, but if you truly understand your financial situation and are in a stable position, then the prospect of a 95% LTV mortgage is well worth exploring. And if you’re unsure, some free mortgage advice can help you gain a better understanding of what’s what.

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Nationwide changes LTV for Self-Employed to 85%

One of the UK’s major mortgage lenders has made a change to the loan-to-value (LTV) amounts it will be offering self-employed workers moving forwards, including contractors and freelancers.

Nationwide Building Society will now only be offering 85% LTV for self-employed mortgage applicants, having previously offered 90% LTV.

Nationwide will continue to offer 90% LTV for first time buyers to help encourage more people to get on the property ladder.  

Nationwide is the one of the largest mortgage lenders in UK, forming part of the traditional ‘big six’ lenders in the market.

What is LTV?

Loan to value is essentially a ratio regarding how much deposit you need to put down on a property, and how much your mortgage will cover the cost of the property overall. 

So if a house is valued at £100,000, and a 90% LTV mortgage is available, then the buyer would need to pay a £10,000 deposit – 10% of the overall cost of the property. The other 90% of the overall total is covered by the mortgage loan, making for 90% LTV value.

If an 85% LTV is in place however, then the mortgage only covers 85% of the overall property cost. For this same hypothetical £100k property, that equates to £85,000. This means that a deposit of £15,000 would need to be put down by any home mover to secure the property.

In this case, £5,000 is the difference between securing this hypothetical property with the two respective LTV values. With most properties today well over the £100,000 mark, this could be the difference for some buyers being able to secure a mortgage and missing out. 15% of a £300,000 house means a deposit of £45,000, whereas 10% is only £30,000. 

Why the limit?

Nationwide is justifying the change by saying it is facing strong demand for mortgages at present due to factors such as the stamp duty holiday.

A reason it is changing the LTV for self-employed workers specifically is because of a reported increased complexity in the underwriting process. This is due to challenges around assessing long-term affordability criteria for self-employed workers given the current pandemic situation. 

In fairness to Nationwide, they have offered one of the best LTV’s for self-employed workers for a fair while. The 85% amount they are changing to is now in keeping with many of the other major lenders, meaning Nationwide now forms part of the status quo rather than jumping out as a good option for self-employed workers looking to secure a new mortgage.

As mentioned, the 90% LTV still stands for first time buyers. So if you are a freelancer or contractor looking to get your first property secured, then Nationwide’s LTV rate remains a good one.

Nationwide has said that the change is temporary, so there is a chance they could at some stage revert back to 90% LTV for self-employed workers. 

What does this mean for contractor and freelancer mortgages right now?

The new limit will apply to any contractor or freelancer seeking a mortgage on a property. As mentioned, the move doesn’t mean that Nationwide isn’t worth looking at when seeking a mortgage, but the 90% LTV selling point is no longer available.

The change is also an example of a major lender reacting to some of the market changes that have been caused by the frankly crazy year we have enjoyed thus far. Whether similar such changes from other lenders come remains to be seen.

But in light of such a market situation and lenders having to potentially adapt to various market factors, getting expert advice on contractor mortgages, freelancer mortgages and residential mortgages certainly becomes all the more important. 

By understanding the various vagaries and vicissitudes of the market at present, it becomes easier to secure the perfect mortgage you are seeking as a self-employed worker