Rising interest rates prompt lenders to clamp down on borrowers with small deposits
First-time buyers are struggling to access mortgages as rapidly rising interest rates have cut the number of products for borrowers with small deposits by more than 40 per cent over the past year.
According to data provider Moneyfacts, there were 199 products on offer over the weekend for would-be buyers looking to borrow up to 95 per cent of the value of the property, down from 347 at the start of June 2022.
The average interest rate on a two-year fixed 95 per cent loan-to-value mortgage jumped by more than 3 percentage points to 6.49 per cent over the same period, while for five-year products it rose more than 2 percentage points to 5.8 per cent.
“The constant rate changes and ongoing market uncertainty is causing havoc,” said Aaron Strutt, director at Trinity Financial. “First-time buyers are struggling to access mortgages, especially if they have smaller deposits.”
Aneisha Beveridge, head of research at estate agent Hamptons, said that lenders’ withdrawal reflected the greater risk of 95 per cent LTV mortgages compared to products with larger deposits.
“Lenders are naturally a bit concerned that the 5 per cent equity that these borrowers did have could be eroded quite quickly by any house price falls,” she said. “It’s a quite common theme in the market, in periods like 2007-2008 or during Covid, that those riskiest, high LTV deals tend to be withdrawn quickly.”
Cash buyers have played an increasingly important role in the property market as debt costs rise, shutting out those who rely on larger amounts of borrowing.
The amount of debt used to fund house purchases fell to 38 per cent of the total in the first quarter of the year, according to research by Savills, down from 46 per cent in the same period last year and 47 per cent before the coronavirus pandemic struck in early 2020.
The mounting challenges facing first-time buyers comes amid a wider upheaval in the mortgage market where two-year fixed term rates passed 6 per cent on Monday.
Mortgage costs have risen sharply over the past week, ahead of an expected increase in interest rates from the Bank of England on Thursday. This is piling pressure on the government as owners needing to remortgage face a sharp jump in repayments, compounding the pressure on household budgets from the cost of living crisis.
The lack of suitable products for borrowers with small deposits is also being felt by housebuilders, which have seen sales fall since last autumn as the property market cools.
First-time buyers are a key part of their customer base but lenders frequently impose stricter rules on mortgages for new-build homes, which has further limited the number of low-deposit products available on those properties.
Steve Turner, executive director of the Home Builders’ Federation, said there were “very few mortgage deals available for buyers of new homes who don’t have access to big savings pots or gifted deposits from family members”.
The trade group has called on the government to support first time buyers by introducing a scheme to replace the Help to Buy initiative scrapped earlier this year, which offered an equity loan to borrowers with as little as a 5 per cent deposit.
“It is the first time in decades there is no government scheme in place to support first-time buyers, at the very point it is most needed,” Turner said.