Yesterday, Nationwide announced that it is to triple the minimum deposit that first-time buyers must put down as it braces itself for falling house prices and the possible return of negative equity.
From Thursday 18 June all 5% deposit mortgages were withdrawn and a new minimum deposit of 15% was set.
Nationwide is not the first bank to start withdrawing high loan to value deals. The unprecedented and uncertain times for borrowers and lenders means lenders are becoming increasingly conscious about the amounts they lend.
We’ve listed 5 positives to take from the reduction in small deposit mortgages
1. Less risk of negative equity
Negative equity is where the value of a property is less than the amount outstanding on the mortgage.
Banks are reducing the maximum loan to value because they are worried that customers may fall into negativity if house prices fall as they are expected to. If you only put down a 5 or 10% deposit you are at a greater risk of falling into negative equity.
Being in negative equity means you will be at a loss if you were to sell the property and it also means remortgaging will be difficult.
2. Prices are expected to fall!
Many property experts are predicting a post coronavirus fall in prices ranging from from 4% up to 16%. e.g. Nationwide building society have said that they expect house prices to fall 13.8 % this year as people delay home moves whilst estate agent Savills predicts a 5% price fall. If the experts’ predictions are so far apart; it’s fair to assume that realistically, nobody knows exactly what will happen to property prices and this uncertainty is exactly why buying a property now can be seen as risky!
3. Reduced demand can lead to lower prices
As there are less low deposit mortgages around, demand for properties typically bought by first time buyers may drop. This drop in demand may lead to a drop in prices/more willingness from owners to accept below market value offers.
4. Forces creativity
Often, when people are met with resistance to achieve their goals, they tend to think of creative ways to overcome the barriers they are facing. The same can be said for the current situation surrounding deposits. Now may be a good time to explore taking out a joint mortgage, or using one of the government schemes.
(Hopefully the government will also start thinking creatively about how they can support first time buyers better!)
5. Deals still available
You can still get a low deposit mortgage. Finding a 90% + LTV mortgage is difficult but possible! According to Moneyfactcs.co.uk there are also currently 341 deals available on an 85% LTV.
If you would like assistance with finding a suitable mortgage deal please email: firstname.lastname@example.org
NB. If you are buying in this climate, I strongly suggest you buy a property below market value.
Overall, whilst I think the reduction in low deposit mortgages is not ideal for buyers, it does allow prospective buyers to:
- Wait and see how the market plays out
- Protect yourself from potential price drops
- Save more
- Source below market value deals
The property market crashed in 2008 because of reckless lending. Perhaps we should be grateful that the banks seem to have now learnt from their mistakes.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.