Throughout the pandemic especially just after the first lockdown started, lower deposit mortgages were just not available. At certain points over the last year or so the highest mortgage available was 85%. As we got into 2021 90% options started to return to the market and it is brilliant that from around March 2021 95% products returned. Since the first lender returned with 95% many others have followed and we now do have a number of options for clients who only have a 5% deposit.
But anyone looking to purchase a property with a 5% deposit should keep the following in mind –
The tightening of lender criteria on affordability and credit scoring –
The more money the lender is willing to offer you the more risk is involved to the lender. As you go up the Loan To Value categories the criteria is always likely to be stricter. The jump above 90% LTV to 95% is where we often see the biggest difference in terms of criteria they require satisfied.
The way the lenders assess income is in many cases is also a lot stricter. Lenders use income multiples as a guideline when it comes to calculating how much you can borrow. There is lot more to that calculation but it is the starting point with an affordability calculation. Each lenders income multiple figure will be different and many lenders calculate things like credit commitments differently as well. Once you go up to 95% many lenders will reduce the income multiple figure, therefore potentially reducing your overall borrowing amount.
How a lender assesses a potential clients credit is also something to look out for at the higher LTV thresholds. With the majority of lenders there is no specific criteria as such when it comes to credit, however the credit scoring algorithms are set up to reflect the additional risk to the lenders. It is fairly common that a lender will agree to lend to a client, with a maximum loan of perhaps 85% or 90% LTV based on credit scoring.
Other things to consider –
Try not to go with the absolute maximum loan available – a lender/mortgage broker will provide you with a decision in principle at some point through the process, usually around the first contact. This provides buyers with a figure they may be able to get borrowing up to. This does not mean it is advisable to take it right up to the maximum figure. Where possible it is advisable to request a mortgage amount from the lender below this figure. It is common, especially at the higher LTV’s for lenders to look at applications in more detail the closer we go to the maximum amount and they can take more into consideration on full assessment, which can sometimes lead to the loan amount being reduced. This comes more into focus if you have slightly more complex income including overtime and Self Employed.
Type of property – the criteria on the property itself also is a lot tighter. For example some lenders will be unwilling to lend on flats at 95% and those who do will have very specific requirements. The likes of New Build properties are often limited to 90% LTV or less depending on the lender. Before putting an offer in on any property it is advisable to speak with a mortgage adviser firstly so you know your options.
*** This article should not be taken as mortgage advice. For mortgage advice please speak with your mortgage adviser ***