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Banks risk a mortgage credit crunch as 90% of small deposit home loans are axed in lockdown – a steeper fall than during the financial crisis

  • Lenders pull high LTV loans faster than they did in the 2008 financial crash
  • More than 90% of the 10% deposit mortgages on offer before lockdown are gone
  • Some borrowers with low equity could struggle to remortgage as a result

Banks and building societies risk triggering a mortgage credit crunch, with 90% of the 10% deposit home loans on offer before lockdown axed.  Figures calculated for This is Money show that banks and building societies have already pulled more low deposit mortgage deals in the past four months than in the entire first year of the financial crisis.  The cuts come as major lenders worry about negative equity if house prices fall and will heavily affect first-time buyers.

Meanwhile, borrowers risk being forced onto their lenders’ expensive standard variable rates at the end of deal terms if they fall below deposit requirements.  The cuts from banks and building societies to their mortgage range comes amid concerns over house prices and as they struggle to process applications due to lockdown restrictions.  It is hitting small deposit, high loan-to-value mortgages hardest.

Using data from financial information specialist Moneyfacts, This is Money calculated the decline in mortgages at different deposit levels since the start of March, and found:

  • The number of 95% LTV mortgages was down 96%
  • The number of 90% LTV mortgages was down 90%
  • The number of 85% mortgages was down 49%
  • The number of 80% mortgages was down 20%

The mortgage market was shaken last week when Britain’s biggest building society Nationwide said it would only lend to new customers who had at least a 15% deposit.  Henry Jordan, Nationwide’s director of mortgages, 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.”The decline in the 90% loan-to-value mortgage market, seen as a key territory for first-time buyers, outstrips the drop in the year that the credit crunch and financial crisis hit.   Between August 2007 and August 2008, 90% loan-to-value mortgages on offer declined 43%.

The mortgage crunch not only means those with small deposits will struggle to buy but those with a small amount of equity in their existing home may struggle to remortgage.  Borrowers could end up stuck on their lenders’ expensive standard variable rates – the rates that mortgage deals move to once the introductory fixed-rate period ends.

To give an idea of how much more expensive this is, the current average rate on a two-year fixed deal is 1.99%, while the average standard variable rate stands at 4.48%, according to finance experts at Moneyfacts.  On a £100,000 loan taken over 25 years, this difference would see monthly interest repayments jump from £423 to £555 – a £132 increase per month.

Nationwide said it would let existing borrowers switch deals above 85% loan-to-value, as long as their loan-to-value was not rising.  If it would, mortgages would be considered on a case by case basis.  Fortunately, most homeowners who bought in recent years with smaller deposit mortgages will have seen some of their loan paid down thanks to monthly repayments and gained some equity from rising house prices.

Who is being hit by the mortgage crunch? 

Mortgage rates are at rock bottom levels and those with big deposits or sizeable equity in their homes have plenty of choice of very cheap fixed rates.  The squeeze is coming or borrowers with less than a 20% deposit or equity.   Those with a 20% deposit have lost a fifth of the mortgages on offer, but those with 15% equity have seen their options cut by half.

But it’s homeowners who have the least equity, for example those who bought their home recently and are looking to remortgage for the first time, who have seen their options reduce most starkly.  The number of mortgages for buyers with just 5% equity has dropped by 96% since lockdown began in March, for example.  This is a bigger drop than the 86% reduction in the number of the same products in the whole first year of the 2008 financial crash.  And even though product numbers fell dramatically in this time, borrowers still had 134 different 95% loan-to-value deals to choose from in August 2008, compared to a mere 16 today.

Similarly, the number of deals for those with a 10% deposit has dropped by 90% since lockdown, compared to the 42% drop seen during the financial crash.  Borrowers in this loan-to-value range now have just 75 different deals to choose from, compared to 475 in August 2008.

Why are lenders pulling deals?

Banks and building societies say that they have scrapped a large part of their mortgage ranges in order to focus on existing customers, as they have been swamped with requests for mortgage holidays.  Combined with lenders’ staff having to work from home – and many being off ill – this has left them struggling to cope with demand.

There is also another factor at play.  Amid the coronavirus lockdown, the Government effectively told people to abandon home moves, putting thousands of property purchases on ice.  During this time surveyors were instructed not to visit properties to value them.  It sparked major worries for mortgage lenders, who were not willing to finance big loans on homes they weren’t confident of a property’s value.  Many responded by pulling all home loans above 60% loan-to-value or suspending new lending altogether.

Lenders are also be worried that house prices might drop in the future as the full economic impact of coronavirus remains to be seen.  Banking giant Lloyds forecast a 5 to 10% fall in house prices in its financial results, meanwhile, estate agent Savills updated its prediction for this year to a 7.5% decline last week.  It said that property prices would rebound from 2021 onwards but growth over the next five years would be subdued.

Should I wait to get a mortgage?

Experts expect the culling of deals to be a temporary measure until lenders get a better view of the damage dealt to the housing market by coronavirus.  This means that if you’re thinking of getting a mortgage, waiting until after the crisis has passed may mean you’ll have a wider range of deals available to you.

However, if you’re currently on a standard variable rate, it could still pay to switch now.

And bear in mind that mortgage offers can last for up to six months. This means some may be in a position to take an offer now and wait to see if a better deal materialises further down the road.

[, 22 June 2020]

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