The 5% mortgage is back - but is it worth it? (2025)

The number of mortgages available to borrowers with just a 5 per cent deposit has risen to its highest level since the financial crisis – but how good an option are they to aspiring homeowners?

There are now 442 mortgages at the 95 per cent loan-to-value (LTV) tier – which and a further 845 for those with a 10 per cent deposit or equity in their home, according to Moneyfacts.

This is the highest number of either type of deal since March 2008.

Low deposit mortgages are often touted as a good way to get on the property ladder for those without large savings, but there are downsides to them too.

The i Paper spoke to experts about the pros and cons of such deals.

What are 5% deposit mortgages and who are they good for?

A 5 per cent deposit mortgage is sometimes referred to as a 95 per cent LTV deal.

As the name suggests they allow a prospective homebuyer to only put down 5 per cent of their property value as a deposit, and borrow the rest as a loan.

Mortgage brokers say the product is relatively niche, with most borrowers opting to put down a bigger deposit.

The rates on the mortgages available with a 5 per cent deposit tend to be quite high. For a five-year fixed deal the best rate is 4.84 per cent, compared to a rate of 4.14 per cent for someone with a 25 per cent deposit.

Having said that, some brokers say they can be a good option for those who do not have a large deposit.

“Though you’ll pay more as a result of the high rate, they can be short-term pain for long-term gain,” said Aaron Strutt of brokers Trinity Financial.

Nick Mendes of John Charcol brokers added: “For those who don’t want to rent, they can be a way to get on the property ladder earlier than they otherwise would have.”

What are the downsides?

As you are borrowing more money, and face a higher rate, the long-term cost of a 5 per cent mortgage can be higher than a standard deposit mortgage.

As an example, if someone were buying a £200,000 home with a 5 per cent deposit, they would be borrowing £190,000 and a rate of 4.84 per cent, they would pay £1,093 per month on a standard 25 year term.

If they bought with a 25 per cent deposit they would be borrowing £150,000 at 4.14 per cent they would repay just £803 per month – £290 less.

Another downside is the risk of going into negative equity.

This is what happens if the value of your property drops, and you are borrowing more than your home is worth.

It can make it hard to sell your home, as you’ll need to make up any gap between the sale price and the amount you borrowed initially, and can make it harder to remortgage in the future.

Experts say this is an unlikely scenario – it only occurs when house prices fall – but it carries more risk of occurring the more you borrow.

“House prices and the housing market aren’t overvalued at the moment which means the risk of negative equity is low,” said Richard Donnell, executive director at Zoopla.

Experts say falling into negative equity is more common on certain types of property, such as flats.

“If you’re buying a flat particularly – those prices have stayed stable or dropped in many areas, so make sure you don’t overpay if you are buying one of those, particularly with a low deposit,” explains Mr Strutt.

There is also a greater risk of going into negative equity if you are planning to move within a few years, as that gives less time for house prices to rise and for you to pay off some of your loan.

“Using a high LTV loan and hoping to trade up to a bigger property in a few years is a risky strategy,” said Mr Donnell.

Brokers say that for some people, if you are getting a low deposit mortgage, a good tactic can be to try and overpay when you can, to reduce the size of your loan.

“Some will get these deals and build up some equity for when they remortgage, as this will help them get better rates,” said Mr Mendes.

“For these people, the low deposit is a short-term bit of pain to get on the ladder, so they may think the higher payments are worth it, especially if they can then reduce them later.”

Who can’t get them?

There are many mortgage customers that can’t get 5 per cent deposit mortgages.

Many lenders don’t offer them on new build properties.

“The main reason most new builds will fall in value initially – similar to buying a new car – before recovering and increasing in three to five years depending on location. There is a fear of negative equity that lenders want to avoid, however lender are starting to take more risks with this,” said Elliott Culley, director at Switch Mortgage Finance.

Some borrowers will also struggle to get access to 5 per cent deposit mortgages. This is because they will not have a high enough income to be able to afford to borrow 95 per cent of the property they are buying’s value.

Most lenders will only let you borrow 4.5 times your income, though some will stretch further than this. Lenders will also ‘stress test’ that you would still be able to afford the mortgage if rates rose.

“You need a high income to buy using a 95 per cent loan. This means its harder to use in southern England and works better in regional markets where house prices are lower,” Mr Donnell said.

As an example, if you were buying a £500,000 home with a 5 per cent deposit, you would be borrowing £475,000, meaning you would need an income of around £100,000 to be able to afford the mortgage.