For first time borrowers, 95 percent mortgages offer a way to take out a loan by paying the lender a five percent deposit. It is important to note that a first time buyer in this instance is considered to be anyone who has not purchased a home within the last three years, meaning that many people will qualify for this status. Also, these loans are based on the appraised value of the home to be purchased, with the lender agreeing to finance ninety-five percent of that value. Though mainly popular in places such as the UK, in the United States California has started to promote these types of loans.

Typically, a 95 percent mortgage is a fixed rate mortgage with higher interest rates those for loans with a higher down payment. And though some lenders will offer a better interest rate for mortgages with a loan-to-value of ninety percent or lower, often mortgage income multipliers can be lower for a mortgage of ninety-five percent. To clarify, mortgage income multipliers are used by lenders in order to determine the amount of money they feel comfortable with lending to the borrower. The multipliers are commonly based on the household income of the borrower. Before the credit crunch, banks would sometimes lend up to five times the amount of annual income for a potential purchaser. Now, however, banks will lend around three times the annual income of a single wage earner. Mortgage brokers also assess the credit score of borrowers to determine how much money to lend, meaning that those who fall into the “excellent” category in regard to credit scores will be loaned more money than those who have less satisfactory scores.

Though the five percent deposit is appealing to many buyers, it can sometimes result in a high commission fee charged by the mortgage broker, which is tacked onto the loan, thereby increasing the amount owed by the borrower. Over the life of 95% mortgages, the interest generated by this fee can add up to a considerable amount of extra money paid by the mortgage holder. Some borrowers choose to get around this by paying the fee upfront, hence avoiding the extra interest.

Sometimes 95 percent mortgages are used in refinancing an existing mortgage for reasons such as making home improvements, covering education expenses, assisting in debt consolidation, etc. Usually, however, these mortgages are preferred by first time buyers with little money saved up for a down payment.