What are the disadvantages of a 95% mortgage?
While a 95% mortgage could be your ticket to becoming a home owner, it does come with drawbacks. Firstly, with such a big mortgage, you run the risk of your home falling into ‘negative equity’ – this is when the value of your home falls below the value of your mortgage. So if your £200,000 home went down in value by more than your 5% deposit, say by 6% to £188,000, then this would be negative equity.
Another disadvantage is that a 95% mortgage won’t give you access to the best deals around. That’s because the general rule of mortgages is: the bigger the deposit you can pay, the better the interest rate you’ll be offered.
Some lenders offering 95% mortgages will insist that you take out a ‘mortgage indemnity guarantee’ (MIG). It’s an insurance policy that protects the lender, in case you default on your mortgage payments.
If you fail to pay your mortgage repayments, you could risk your home being repossessed.