95% Mortgages Briefly Explained

For first-time borrowers, it might be a good idea to obtain a 95% mortgage rates. The rationale behind 95% mortgages is that the borrower gets a loan while the lender receives a 5% deposit on the outstanding amount. A “first-time borrower” is a person who has not purchased a new house within the last three years. As such, the potential homeowners who can qualify for 95% fixed rate mortgages are numerous. This mortgage is also known as an LTV, or loan to value of up to 95 percent, and is extremely well-utilized in the UK. Such a mortgage is also advocated for first-time borrowers by the state of California.

LTV mortgages tend to be subject to a fixed rate. However, there are lenders who offer a more advantageous interest rate if a 90% LTV is involved. On the other hand, mortgage income multipliers for 95% mortgages tend to be lower than that of a 90% mortgage.

Drawbacks

While the 5% deposit on a 95% mortgage appears attractive at first, a hefty back-end fee can be tacked on to the total mortgage. Some consider this fee to be a lending charge, and it eventually drives up the sum owed to the lender. This means that while the initial amount may be modest, the interest accrued by the extra fee over the next 25 years or so can burn a real hole in the borrower’s pocket. As such, some borrowers opt to pay the fee immediately to avert these charges. Making sure you get a good rate is one of the best money saving tips out there.

Mortgage Multipliers

Most new borrowers would not know what these are. Sometimes, they are also known as income multipliers, which are used during a loan assessment process where the lender estimates how much a borrower can be loaned. The sum is usually generated from household income. A multiplier based on the income of a single wage earner potentially qualifies an applicant for a mortgage of up to 3 times his or her yearly income. For dual-income households, the multiplier might deem the potential mortgage to be worth 2.5 times the household’s income.

If the LTV ratio is low though, then the use of a high multiplier is relative. Banks and similar lenders tend to use another multiplier to determine loan amounts – a person’s credit score. A person with an excellent score stands a better chance of being able to borrow a higher amount than a person with an average credit score.

Another Downside

Other than the lending fee, another drawback to 95% mortgages is, despite fixed interest rates, the overall interest charged is greater than that of mortgages where larger down payments are involved. Additionally, a lender might also limit the amount that can be borrowed if an applicant opts for a 95% mortgage.

Final Decisions

Where refinancing is concerned, a mortgage can be used to improve the home, raise cash, meet education expenses, consolidate debt, and enable property and vacation purchases. However, many mortgages are 95% mortgages which are more suited to first-time home buyers. This demographic usually does not have the cash for a down payment on a new home.