Borrowers may struggle to get a mortgage as lenders continue to pull offers during the coronavirus lockdown. We talk about your options as a borrower with a small deposit.
Five lenders have withdrawn all of their 90% and 95% deals in the last two weeks in response to the coronavirus lockdown.
This has predominantly impacted the first-time buyers market, where people typically benefit from higher loan-to-value (LTV) mortgage deals.
Nationwide became the latest lender to pull its 90% and 95% LTV mortgages this week. It follows Virgin Money, Accord Mortgages, Yorkshire Bank and Clydesdale.
Only 16 different mortgage products remain for people borrowing 95% of their home’s value.
This is down from 391 at the beginning of March, according to financial information group Moneyfacts.
Why are lenders withdrawing mortgages?
Mortgage lenders are being more cautious in light of the impact of the coronavirus pandemic on the UK economy.
On the one hand, lenders are concerned that a pause in economic growth and a rise in unemployment could cause house prices to fall.
This could leave borrowers in negative equity (when the value of their home is less than the value of the mortgage they are repaying).
Borrowers with smaller deposits are seen as being at higher risk of falling into negative equity because they have higher monthly payments.
In response to these factors, some lenders are withdrawing higher LTV mortgage products.
Who does this situation affect?
This situation comes as upsetting news for first-time buyers aspiring to get on to the property ladder with a deposit of just 5% or 10%.
It could also cause problems for those who bought their first home two years ago, and are currently looking to remortgage with a small deposit.
House price growth has been muted in some regions over the last two years. As a result, these prospective buyers are unlikely to have built up a sufficient equity stake to be able to qualify for an 85% mortgage deal.
I only have a small deposit, what should I do?
Do not panic. You still have a number of options.
Firstly, there are still mortgage deals available.
As mentioned above, there are 16 deals available for borrowers with 5% deposits, but this expands to 75 deals for those with a deposit of 10%. There is also significantly more choice for people with a 15% deposit, with 341 different mortgage products currently available.
If you are struggling, it may be worth speaking to an independent mortgage broker who will be able to help you search the entire market to find the best deal for you.
What about Help to Buy?
This initiative allows people to purchase a home with just a 5% deposit.
With the Help to Buy scheme, the government tops up a 5% deposit with a 20% equity loan, allowing buyers to qualify for a 75% LTV mortgage.
You could also raise money for your deposit by increasing your savings or borrowing from family members.
What if I need to remortgage?
The situation is more complex if you are looking to remortgage, but again, there is no need to panic.
If you cannot switch to a new deal when your existing one comes to an end, you will automatically be put on to your lender’s revert rate. This is usually known as the standard variable rate (SVR).
Although the interest charged on SVRs tends to be higher than rates for tracker and fixed-rate mortgages, you will not be at risk of losing your home as long as you keep up with repayments.
You can stay on this rate while you wait for lenders to return to this segment of the market.
If you find yourself unable to remortgage, it is worth talking to your lender about your situation. They will always do their best to help you keep your mortgage repayments affordable.
Look after your credit rating
The size of your deposit is only one of the factors lenders look at when assessing mortgage applications. Your credit rating also plays an integral role.
As such, it is a good idea to make sure your credit score is as good as possible.
You can do this by making sure all of your personal details are up-to-date and that you are registered on the electoral roll.
You should also ensure you never miss a payment or make a late payment, and always pay off more than the minimum each month for any credit cards you have.
It is even better if you can clear your credit card debt in full each month.
Top three takeaways
Lenders are pulling their mortgages for people with small deposits, striking a blow to first-time buyers.
Only 16 different mortgage products remain for people borrowing 95% of their home’s value, and there are just 75 products available for people borrowing 90%
Five lenders have pulled all of their 95% and 90% mortgages in the past two weeks