For those looking to take out a mortgage, and particularly anybody in the position of getting a mortgage on their first home, the property market is looking a little less friendly this week. Banks have lined up to announce new restrictions and charges, increasing their interest rates and limiting the availability of high loan-to-value deals.
Traditionally, people with smaller deposits could still take out a mortgage through 90% or even 95% offerings. The percentage refers to the proportion of the property value that the bank is willing to offer as a loan: so, for instance, a 90% mortgage would mean paying a 10% deposit and borrowing the rest.
Many banks pulled their 95% deals earlier this year. Over the past few weeks they have begun to do the same with 90% mortgages: Nationwide, Virgin Money and Yorkshire Bank are all on the list of lenders who have decided to drop those products. HSBC are still offering them at present, but the interest rates have shot up meaning that you would be expected to repay more over time.
This sounds like bad news for borrowers, but the absence of low-deposit mortgages may actually be a good thing when analysts are predicting that property prices will fall over the coming months and years. When property prices fall, those who have paid small deposits are at the highest risk of falling into negative equity – what happens when the value of your home becomes less than your remaining mortgage.
Negative equity can be a huge problem for homeowners, who end up trapped in their home with a debt that they can’t shift. Although banks are certainly protecting their own interests here, it’s fair to say that nobody should be taking out a mortgage for more than they can afford.
Nationwide’s director of borrowing, Henry Jordan, said: “The outlook for the mortgage market and house prices remains uncertain. As a responsible lender we must factor this uncertainty into our lending assessments, which is why we have taken the decision to reduce our maximum LTV for new business.”
“Our priority at this time must be to help members keep their homes. As such, we need to ensure our members can afford their repayments, while doing what we can to protect them from falling into negative equity.”
All this being said, it is still possible to get onto the housing ladder at 90% if you know where to look. Those who have a 10% deposit saved and ready to go should avoid brokers and approach the banks directly to see if they will consider a deal. Some are still offering them on a case by case basis, although you’ll likely need a spotless credit history and you’ll have to be willing to settle for a less competitive interest rate.
It’s also likely that banks will relaunch these products sooner rather than later. They are very popular mortgage deals, and without them banks may struggle to bring new first-time buyers into the market. Given the huge amount of uncertainty and instability in the market, we would suggest that anyone about to take out a mortgage checks in daily on different providers’ websites to see what new products may have become available.