WHY LENDERS ARE REDUCING THEIR LOW DEPOSIT MORTGAGES
Low deposit mortgages, requiring as little as 10 percent or even 5 percent down payment, are vanishing from the market. This change presents challenges for first-time buyers and those seeking right to buy mortgages.
Virgin Money has already ceased offering such mortgages, and other lenders plan to follow suit. The driving force behind this shift is the anticipation of a significant drop in house prices. If this decline is as severe as predicted, it could pose substantial difficulties for homeowners in the early stages of their mortgage repayment journey.
The key factor at play here is equity – the difference between a home's value and the outstanding loans and expenses against it. For instance, someone purchasing a £400,000 home with a 5 percent deposit initially holds roughly £20,000 in home equity. As the mortgage is paid down, equity accumulates.
However, equity can also fluctuate with changes in property value. During a housing boom, rising property values contribute to increasing equity. But when house prices begin to decline, equity dwindles, and negative equity becomes a possibility. Negative equity occurs when a home's value falls below the outstanding loan amount, a concern particularly with interest-only mortgages.
While negative equity may not pose immediate problems for long-term homeowners, it can become an issue if mortgage default leads to repossession. In such cases, lenders can pursue borrowers for the remaining loan balance, leaving lenders at risk of financial losses.
To mitigate this risk, lenders are discontinuing low deposit mortgage products, safeguarding against the potential pitfalls of negative equity. For expert guidance on mortgages, contact Yes FS at 0800 083 0449.